Economic Integration, Industrial Specialization, and the Asymmetry of Macroeconomic Fluctuations

Abstract

We show empirically that regions with a more specialized production structure exhibit output fluctuations that are less correlated with those of other regions (less 'symmetric' fluctuations). Combined with the causal relation running from capital market integration to regional specialization found in an earlier study, this finding supports the idea that higher capital market integration leads to less symmetric fluctuations. This mechanism counterbalances the effect of lower trade-barriers on the symmetry of fluctuations quantified by Frankel and Rose (1998). Deriving a simple closed form expression for the gains from risk sharing for CRRA utility is an independent contribution of the present article.

Trade, Finance, Specialization, and Synchronization

“…Otto, Voss and Willard (2001), Kalemli-Ozcan, Sorensen and Yosha (2001) and Imbs (2001) all …nd a signi…cantly positive role for an index of similarity in production structures. Clark and van Wincoop (2001) use a similar index to account for higher business cycle correlations within than between countries.…”

“…18 Kalemli-Ozcan, Sorensen and Yosha (2001) estimate a variant of equation (1), but without a trade term. Then, Kalemli-Ozcan, Sorensen and Yosha (2002) estimate a variant of equation (3), and let specialization depend on …nancial integration.…”

Foreign direct investment and business cycle co-movements: The panel data evidence

“…(ii) economic integration (Kalemli-Ozcan et al (2001)); (iii) similarity of fiscal policies (Clack and van Wincoop (2001)); (iv) exchange rate volatility ); and others (see for a recent survey).…”

Regional Business Cycles and National Economic Borders: What Are the Effects of Trade in Developing Countries?

“…11 Imbs (2003), Clark and van Wincoop (2001), and Calderón et al (2003) present evidence that confirms this hypothesis. Consistently, Kalemli-Ozcan et al (2001) find that U.S. states with a higher degree of sectoral specialization have lower correlation with U.S. aggregate GDP. disaggregated one that covers nine sectors (Dissimilarity 9) for the period 1985-2000 (see Table A1 in Appendix A for more details).…”