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Vertical Specialization and International Business Cycle Synchronization

  • Ananth Ramanarayanan

    (Federal Reserve Bank of Dallas)

  • Costas Arkolakis

    (Yale University and NBER)

We explore the impact of vertical specialization - trade in goods across multiple stages of production - on the relationship between trade and international business cycle synchronization. We develop a model in which the degree of vertical specialization is endogenously determined by comparative advantage across heterogeneous goods and varies with trade barriers between countries. We show analytically that fluctuations in measured productivity in our model are not linked across countries through trade, despite the greater transmission of technology shocks implied by higher degrees of vertical specialization. In numerical simulations, we find this transmission is insufficient in generating substantial dependence of business cycle synchronization on trade intensity.

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Paper provided by Society for Economic Dynamics in its series 2009 Meeting Papers with number 780.

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Date of creation: 2009
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Handle: RePEc:red:sed009:780
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