The Trade Comovement Problem in International Macroeconomics

30 Pages Posted: 4 Apr 2003

See all articles by M. Ayhan Kose

M. Ayhan Kose

World Bank; Brookings Institution; Centre for Economic Policy Research (CEPR); Australian National University (ANU)

Kei-Mu Yi

Federal Reserve Banks - Federal Reserve Bank of Dallas

Date Written: December 2002

Abstract

Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures: Complete markets and international financial autarky. Our main finding is that under international financial autarky the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. In our benchmark calibrations, the model explains at most 6 percent of the responsiveness of GDP correlations to trade found in the empirical research. This result is robust to many combinations of shock specifications, import shares, and elasticities of substitution. Because the difference between business cycle theory and the empirical results cannot be resolved by changes in parameter values and the structure of the standard models, we call this discrepancy the trade comovement problem.

Keywords: international trade, international business cycles, comovement, stochastic dynamic business cycle model, synchronization

JEL Classification: F4

Suggested Citation

Kose, M. Ayhan and Yi, Kei-Mu, The Trade Comovement Problem in International Macroeconomics (December 2002). FRB of New York Staff Report No. 155, Available at SSRN: https://ssrn.com/abstract=368201 or http://dx.doi.org/10.2139/ssrn.368201

M. Ayhan Kose (Contact Author)

World Bank

1818 H Street, NW
Washington, DC 20433
United States

Brookings Institution

1775 Massachusetts Ave, NW
Washington, DC 20036
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Australian National University (ANU)

Canberra, Australian Capital Territory 2601
Australia

Kei-Mu Yi

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

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