Trade Integration and Business Cycle Convergence: Is the Relation Robust across Time and Space?*

Abstract

In this paper we investigate the relationship between trade intensity and the business cycle correlation using a panel data set taken from 24 countries over the period 1959–2003. Most previous studies did not account for the possibility that the business cycle correlation may be influenced by unobservable country‐pair specific effects. Our estimates, using both fixed‐ and random‐effects methodologies, suggest that trade intensity and the business cycle correlation are positively related to one another. However, detailed investigation shows that this relationship exists mainly for the European countries.

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

“…Indeed, as noticed in figure 1, the share of new trade flows is variable over time and across countries. This finding is in line with the recent evidence provided by Harris et al (2012) and Abbott et al (2008) at the world To our knowledge the effect of the transitory nature of bilateral trade flows on bilateral business cycle correlation has not yet been studied in the literature although it may shed light to the debate on the interplay between trade and business cycle synchronization. Indeed, coherence estimates reported in table 2 reveal the close association between bilateral trade and the coupling of business cycles despite strong disparities across the euro countries.…”

“…This effect may interact with other factors such as product diversification or the convergence in macroeconomic policies according to Inklaar et al (2008). Moreover, Abbott et al (2008) find that the dependence of business cycle on trade intensity is both timely and geographically dependent, being negative in some cases.…”

“…Here we adopt the empirical strategy initially developed by Imbs (2004) and extended to panel data analysis by Abbott et al (2008). A panel data model with 3SLS estimators fits well to the question at hand.…”

“…We report results from a three-stage-least-squares (3SLS) panel estimation of equations (10) (2008) and Abbott et al (2008). Specialization has a negative impact on synchronization (-1.020).…”

“…We adapt the simultaneous equation framework initially developed by Imbs (2004Imbs ( , 2010 and extended by Abbott et al (2008) to a panel data model. In contrast with the existing literature, we consider new trade flows as a separate driver of business cycle synchronization in association with trade intensity and trade structure.…”