Trade, Production Sharing, and the International Transmission of Business Cycles

36 Pages Posted: 11 Jan 2008 Last revised: 10 Jul 2010

See all articles by Ariel T. Burstein

Ariel T. Burstein

University of California, Los Angeles (UCLA) - Department of Economics

Christopher Johann Kurz

Board of Governors of the Federal Reserve System

Linda L. Tesar

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: January 2008

Abstract

Countries that are more engaged in production sharing exhibit higher bilateral manufacturing output correlations. We use data on trade flows between US multinationals and their affiliates as well as trade between the United States and Mexican maquiladoras to measure production-sharing trade and its link with the business cycle. We then develop a quantitative model of international business cycles that generates a positive link between the extent of vertically integrated production-sharing trade and internationally synchronized business cycles. A key assumption in the model is a relatively low elasticity of substitution between home and foreign inputs in the production of the vertically integrated good.

Suggested Citation

Burstein, Ariel T. and Kurz, Christopher Johann and Tesar, Linda L., Trade, Production Sharing, and the International Transmission of Business Cycles (January 2008). NBER Working Paper No. w13731. Available at SSRN: https://ssrn.com/abstract=1082750

Ariel T. Burstein

University of California, Los Angeles (UCLA) - Department of Economics ( email )

Box 951477
Bunche Hall 8365
Los Angeles, CA 90095-1477
United States
310-206-6732 (Phone)
310-825-9528 (Fax)

Christopher Johann Kurz

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551

Linda L. Tesar (Contact Author)

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
Ann Arbor, MI 48109-1220
United States
734-763-2254 (Phone)
734-764-2769 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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