Trade Intensity and Business Cycle Synchronization: Are Developing Countries Any Different?

43 Pages Posted: 21 Apr 2011

See all articles by César A. Calderón

César A. Calderón

Central Bank of Chile

Alberto Chong

University of Ottawa

Ernesto Stein

Inter-American Development Bank (IDB)

Date Written: January 2003

Abstract

Some key criteria in the optimal currency area literature are that countries should join a currency union if they have closer international trade links and more symmetric business cycles. However, both criteria are endogenous. Frankel and Rose (1998) find that trade intensity increases cycle correlation among industrial countries. We study whether the same result holds true for the case of developing countries, as their different patterns of international trade and specialization may lead to cyclical asymmetries among them and between industrial and developing countries. We gather annual information for 147 countries for 1960-99 (33,676 country pairs) and find: (i) countries with higher bilateral trade exhibit higher business cycle synchronization, with an increase of one standard deviation in bilateral trade intensity raising the output correlation from 0. 05 to 0. 09 for all country pairs; (ii) countries with more asymmetric structures of production exhibit a smaller business cycle correlation; (iii) the impact of trade integration on business cycles is higher for industrial countries than both developing and industrial-developing country pairs; (iv) a one standard deviation increase in bilateral trade intensity leads to surges in output correlation from 0. 25 to 0. 39 among industrial countries, from 0. 08 to 0. 10 for our sample of industrial-developing country pairs, and from 0. 03 to 0. 06 among developing countries; (v) the impact of trade intensity on cycle correlation is smaller the greater the production structure asymmetries between the countries.

Suggested Citation

Calderon, Cesar A. and Chong, Alberto and Stein, Ernesto Hugo, Trade Intensity and Business Cycle Synchronization: Are Developing Countries Any Different? (January 2003). IDB Working Paper No. 400, Available at SSRN: https://ssrn.com/abstract=1817272 or http://dx.doi.org/10.2139/ssrn.1817272

Cesar A. Calderon (Contact Author)

Central Bank of Chile ( email )

Agustinas 1180
Santiago
Chile

Alberto Chong

University of Ottawa ( email )

2292 Edwin Crescent
Ottawa, Ontario K2C 1H7
Canada

Ernesto Hugo Stein

Inter-American Development Bank (IDB) ( email )

1300 New York Avenue, NW
Research Department
Washington, DC 20577
United States

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