Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement

56 Pages Posted: 17 Sep 2009

See all articles by Andrei A. Levchenko

Andrei A. Levchenko

University of Michigan - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Julian di Giovanni

Federal Reserve Banks - Federal Reserve Bank of New York; Universitat Pompeu Fabra - Department of Economics and Business; Barcelona Graduate School of Economics (Barcelona GSE); CREI and Universitat Pompeu Fabra; Centre for Economic Policy Research (CEPR)

Date Written: August 2009

Abstract

Countries that trade more with each other exhibit higher business cycle correlation. This paper examines the mechanisms underlying this relationship using a large cross-country industry-level panel dataset of manufacturing production and trade. We show that sector pairs that experience more bilateral trade exhibit stronger comovement. Vertical linkages in production are an important explanation behind this effect: bilateral international trade increases comovement significantly more in cross-border industry pairs that use each other as intermediate inputs. Our estimates imply that these vertical production linkages account for some 30% of the total impact of bilateral trade on the business cycle correlation.

Keywords: Bilateral trade, Business cycles, Cross country analysis, Economic models, Globalization, Industrial production, Industrial sector, Industrial trade, International trade, Manufacturing sector, Trade relations

Suggested Citation

Levchenko, Andrei A. and di Giovanni, Julian, Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement (August 2009). IMF Working Paper No. 09/181, Available at SSRN: https://ssrn.com/abstract=1474589

Andrei A. Levchenko (Contact Author)

University of Michigan - Department of Economics ( email )

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Ann Arbor, MI 48109-1220
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HOME PAGE: http://alevchenko.com

National Bureau of Economic Research (NBER) ( email )

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Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Julian Di Giovanni

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://julian.digiovanni.ca

Universitat Pompeu Fabra - Department of Economics and Business ( email )

Barcelona
Spain

HOME PAGE: http://julian.digiovanni.ca

Barcelona Graduate School of Economics (Barcelona GSE) ( email )

Ramon Trias Fargas, 25-27
Barcelona, Barcelona 08005
Spain

HOME PAGE: http://julian.digiovanni.ca

CREI and Universitat Pompeu Fabra ( email )

HOME PAGE: http://julian.digiovanni.ca

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

HOME PAGE: http://julian.digiovanni.ca

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