Trade and Synchronization in a Multi-Country Economy

TY - JOUR

T1 - Trade and Synchronization in a Multi-Country Economy

AU - Juvenal, Luciana

AU - Santos Monteiro, Paulo

N1 - This is an author-produced version of the published paper. Uploaded in accordance with the publisher’s self-archiving policy.

PY - 2017/2

Y1 - 2017/2

N2 - Countries with strong trade linkages have more synchronized business cycles. However, the standard international business cycle framework cannot replicate this finding, uncovering the trade-comovement puzzle. Modeling trade using more sophisticated micro-level assumptions does not help resolve the puzzle. This happens because for a large class of trade models, under certain macro-level conditions, output comovement is determined by the same factor structure. We show that in such models comovement can be explained by three factors: (i) the correlation between each country's TFP; (ii) the correlation between each country's share of expenditure on domestic goods; and (iii) the correlation between each country's TFP and the partner's share of expenditure on domestic goods. An empirical investigation of the link between trade and each of the three factors shows that the trade-comovement relation is in large part explained by the second factor while in the theoretical model this factor reacts counterfactually to changes in trade costs.

AB - Countries with strong trade linkages have more synchronized business cycles. However, the standard international business cycle framework cannot replicate this finding, uncovering the trade-comovement puzzle. Modeling trade using more sophisticated micro-level assumptions does not help resolve the puzzle. This happens because for a large class of trade models, under certain macro-level conditions, output comovement is determined by the same factor structure. We show that in such models comovement can be explained by three factors: (i) the correlation between each country's TFP; (ii) the correlation between each country's share of expenditure on domestic goods; and (iii) the correlation between each country's TFP and the partner's share of expenditure on domestic goods. An empirical investigation of the link between trade and each of the three factors shows that the trade-comovement relation is in large part explained by the second factor while in the theoretical model this factor reacts counterfactually to changes in trade costs.

KW - Business Cycle Synchronization

KW - International Trade

U2 - 10.1016/j.euroecorev.2016.06.005

DO - 10.1016/j.euroecorev.2016.06.005

M3 - Article

SN - 0014-2921

VL - 92

SP - 385

EP - 415

JO - European economic review

JF - European economic review

ER -