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Trade Integration and Business Cycle Synchronization in the EMU: the Negative Effect of New Trade Flows

Author

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  • Jean-Sébastien Pentecôte

    (University of Rennes 1 - CREM UMR CNRS 6211, France)

  • Jean-Christophe Poutineau

    (University of Rennes 1 - CREM UMR CNRS 6211, France)

  • Fabien Rondeau

    (University of Rennes 1 - CREM UMR CNRS 6211, France)

Abstract

This paper questions the impact of trade integration on business cycle synchronization in the EMU by distinguishing increase of existing trade flows (the intensive margin) and creation of new trade flows (the extensive margin). Using a DSGE model, we find that synchronization is weakened when new firms are allowed to export in response to productivity gains. Using disaggregated data over 1995–2007 for the 10 founding members of the EMU and consistently with our model, we find that trade intensity has a positive direct effect while new trade flows have a negative effect on business cycle synchronization. Furthermore, new flows play essentially an indirect role by intensifying specialization and explain 60% of the overall effect of trade intensity and specialization on synchronization.

Suggested Citation

  • Jean-Sébastien Pentecôte & Jean-Christophe Poutineau & Fabien Rondeau, 2013. "Trade Integration and Business Cycle Synchronization in the EMU: the Negative Effect of New Trade Flows," Economics Working Paper Archive (University of Rennes 1 & University of Caen) 201313, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  • Handle: RePEc:tut:cremwp:201313
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    Cited by:

    1. Emilia Gyoerk, 2017. "Economic Costs and Benefits of EMU Membership from the Perspective of a Non-member," Open Economies Review, Springer, vol. 28(5), pages 893-921, November.
    2. Chevallier, Julien & Nguyen, Duc Khuong & Siverskog, Jonathan & Uddin, Gazi Salah, 2018. "Market integration and financial linkages among stock markets in Pacific Basin countries," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 77-92.
    3. Igor Velickovski & Aleksandar Stojkov & Ivana Rajkovic, 2017. "DIS Union of the Core and the Periphery," International Journal of Economics and Financial Issues, Econjournals, vol. 7(6), pages 159-174.
    4. Nguyen, Duc Khuong & Sensoy, Ahmet & Sousa, Ricardo M. & Salah Uddin, Gazi, 2020. "U.S. equity and commodity futures markets: Hedging or financialization?," Energy Economics, Elsevier, vol. 86(C).
    5. Rémi Odry & Roman Mestre, 2021. "Monetary Policy and Business Cycle Synchronization in Europe," EconomiX Working Papers 2021-19, University of Paris Nanterre, EconomiX.
    6. Michael Curran & Adnan Velic, 2020. "The CAPM, National Stock Market Betas, and Macroeconomic Covariates: a Global Analysis," Open Economies Review, Springer, vol. 31(4), pages 787-820, September.

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    More about this item

    Keywords

    Trade Integration; New Trade Flows; Business Cycles; Synchronization; European Monetary Union;
    All these keywords.

    JEL classification:

    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F15 - International Economics - - Trade - - - Economic Integration
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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