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Bilateral Linkages and the Dynamics of International Business Cycle Comovement

52 Pages Posted: 10 Nov 2013 Last revised: 28 Apr 2016

Lance Kent

College of William and Mary - Department of Economics

Date Written: April 27, 2016

Abstract

This paper uses uses a novel type of panel vector autoregression to establish that the well-known association between linkages and business cycle comovement has both intratemporal and intertemporal dimensions. When two countries are more closely linked (i.e., they trade more or hold more financial assets in each other), business-cycle fluctuations in one country have greater dynamic spillovers in the other. The association between linkages and dynamic spillovers varies across types of good traded, types of assets held, and whether the spillovers are traveling upstream or downstream. Import and export intensity are asymmetrically associated with spillovers; bilateral portfolio equity holdings are associated with comovement within quarters (but not at a delay of a quarter); the import of goods used for capital formation is strongly associated with spillovers both within quarters and at a delay of a quarter. The novel stylized facts shed new light on mechanisms for the international transmission of shocks in commonly used business cycle models: several mechanisms which the literature has found to strengthen the relationship between trade and business cycle correlation do not give rise to the intertemporal spillovers found in the data.

Keywords: International Business Cycles, International Panel VAR, Trade and Financial Integration, Comovement, International Real Business Cycle Model

JEL Classification: F41, F21, E32, C33

Suggested Citation

Kent, Lance, Bilateral Linkages and the Dynamics of International Business Cycle Comovement (April 27, 2016). Available at SSRN: https://ssrn.com/abstract=2352177 or http://dx.doi.org/10.2139/ssrn.2352177

Lance Kent (Contact Author)

College of William and Mary - Department of Economics ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

HOME PAGE: http://www.lancekent.org

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