Trade, Finance, Specialization, and Synchronization

Abstract

I investigate the determinants of business cycles synchronization, across regions and over time. I use both international and intranational data to evaluate the linkages between trade in goods, trade in …nancial assets, specialization and business cycles synchronization in the context of a system of simultaneous equations. In all speci…-cations, the results are as follows. (i) Simultaneity is important, as both trade and …nancial openness have a direct and an indirect e¤ect on cycles synchronization. (ii) Countries with liberalized capital accounts (and States with high degree of risk sharing) are signi…cantly more synchronized, even though they are also more specialized. (iii) Specialization patterns have a sizeable e¤ect on business cycles, above and beyond their re ‡ection of intra-industry trade and of openness to goods and assets trade. (iv) The role of trade, in turn, is in line with existing models once intra-industry trade is controlled for. Furthermore, trade-induced specialization has virtually no e¤ect on cycles synchronization. The results obtain in a variety of cross-sections and panels. They relate to a recent strand of International Business Cycles models with incomplete markets and transport costs, and on the empirical side, point to an important omission in the list of criteria de…ning an Optimal Currency Area, namely specialization patterns. JEL Classi…cation Numbers: F41, E32.

Convergence of Regional Economic Cycles in Turkey

“…The second important component of the economic integration is the transfer of factors, such as capital integration and interregional risk sharing that might play important roles in the convergence process of business cycles (Imbs ). The limited ability of provinces to borrow and lend hampers the transfer of resources that creates interregional risk sharing against economic shocks and, in that case, provinces are likely to have more correlated shifts in their business cycles (Imbs ).…”

“…From a theoretical point of view, lack of synchronization is mostly explained by inadequate cross‐border trade and financial linkages, dissimilarities in the industrial structure and labor market arrangements. Moreover, different responses of the regions to common shocks, such as unanticipated changes in interest rates, commodity prices and productivity shocks might contribute to the process of cyclical divergence (Carlino & DeFina ; Imbs ; Selover et al . ).…”

Wage Divergence, Business Cycle Co‐Movement and the Currency Union Effect

“…While the positive effect of bilateral trade links on BC synchronization is now firmly established (Frankel and Rose, ; Gächter and Riedl, ; Inklaar et al ., ), there is little consensus on other determinants. Darvas et al (), for instance, highlight the importance of fiscal variables such as similar budget deficits and public debt while Imbs () stresses the relevance of financial integration. Gächter and Riedl () show that EMU membership per se has increased BC synchronization across member countries.…”

Leverage Constraints and the International Transmission of Shocks

“…Thus Kose and Yi (2006) find that it is hard to account for the magnitude of business cycle comovements among countries using conventional international real business cycle models. In addition, there is evidence that business cycle comovement is greater between countries with greater financial integration (Imbs 2004, 2006). Nevertheless, in the standard international business cycle model, enhanced international financial integration actually tends to reduce business cycle comovement, since it allows for a more efficient reallocation of resources across countries in response to shocks (Heathcote and Perri 2002, 2005).…”