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Trade, Production Sharing and the International Transmission of Business Cycles

Author

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  • Ariel Burstein

    (UCLA)

  • Christopher Johann Kurz

    (University of Michigan)

  • Linda Tesar

    (University of Michigan)

Abstract

This paper is motivated by three observations about the link between international trade and international business cycle synchronization: (1) a large increase in trade in manufactures over the last 30 years, (2) a larger fraction of trade between core and periphery regions relative to core regions is in the form of production sharing, (3) crosscountry output correlations have increased between core and periphery regions relative to core regions. We examine to what extent these observations can be reconciled in a multi-country version of a standard model of international business cycles. Production sharing is captured in a simple way as trade in intermediate inputs that are complements in production. We find that the model is successful qualitatively in account for these observations. Quantitatively, we find that the direct effects from trade do not generate large divergence in output correlationsacrosscountries. Weextendthemodel to allow for cost reduction spillovers from MNEs in the core country to their affiliates in the periphery. This mechanism increases the impact that product sharing has on output correlations between core and peripheral countries.

Suggested Citation

  • Ariel Burstein & Christopher Johann Kurz & Linda Tesar, 2004. "Trade, Production Sharing and the International Transmission of Business Cycles," Working Papers 522, Research Seminar in International Economics, University of Michigan.
  • Handle: RePEc:mie:wpaper:522
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    More about this item

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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