Do Trade and Financial Linkages Foster Business Cycle Synchronization in a Small Economy?

Abstract

Documentos de Trabajo. N.º 0810 2008The Working Paper Series seeks to disseminate original research in economics and finance. All papers have been anonymously refereed. By publishing these papers, the Banco de España aims to contribute to economic analysis and, in particular, to knowledge of the Spanish economy and its international environment.The opinions and analyses in the Working Paper Series are the responsibility of the authors and, therefore, do not necessarily coincide with those of the Banco de España or the Eurosystem.The Banco de España disseminates its main reports and most of its publications via the INTERNET at the following website: http://www.bde.es.Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged.

Does integration and economic policy coordination promote business cycle synchronization in the EU?

“…All variables are bilateral and are constructed as five year rolling windows for the following groups: EU27, EU15, EU15-newEU12, EA11 and Core Vs Periphery. The detailed definition and sources of variables, descriptive statistics and the country groupings used in this study are given in Tables 1, 2 Financial linkages between two partners are represented as the sum of bilateral assets (FDI stocks) related to the sum of GDP of the two countries, a measure also applied in Fidrmuc et al (2010) and García-Herrero and Ruiz (2008). FDI was the most challenging variable because of the necessity to work with bilateral FDI stocks.…”

Financial Regulation, Financial Globalization and the Synchronization of Economic Activity

“…11 The only study to our knowledge that documents a negative association between financial integration and synchronization is Garcia-Herrero and Ruiz (2008). These authors use capital account data for Spain and document a lower GDP synchronization of Spain with countries that Spain has strong financial linkages.…”

Economic versus financial integration or decoupling between the US and the GCC

“…Additionally, Mojon (2007), by using the Markov Switching Vector Autoregression (MS-VAR) to model the shocks in the US monetary policy in relation with the household investment and business cycles, finds that the monetary policy contributed to the drop in the volatility of output fluctuations, and eventually led to the decoupling of household investment from the business cycles. Decoupling in the sense closer to our usage was studied by Garcı´a-Herrero and Ruiz (2008) where they find more financial integration between Spain and its trading partners than output and trade with the help of a set of simultaneous equations to search for mutual effects between Spain and its trade partners. On the other hand, Pula and Peltonen (2009) conclude that there is no decoupling between the emerging Asian countries, the US, the EU15, and Japan via trade and production linkages based on an update of the Asian International Input-Output table.…”