Trade, Finance, Specialization and Synchronization

45 Pages Posted: 21 Apr 2003

See all articles by Jean M. Imbs

Jean M. Imbs

Paris School of Economics (PSE); NYU Abu Dhabi; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: February 2003

Abstract

I investigate the determinants of business cycles synchronization across regions. I use both international and intranational data to evaluate the linkages between trade in goods, trade in financial assets, specialization and business cycles synchronization in the context of a system of simultaneous equations. In all specifications, the results are as follows. (i) Simultaneity is important, as both trade and financial openness have a direct and an indirect effect on cycles synchronization. (ii) A variety of alternative measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized, even though they are also more specialized. (iii) Specialization patterns have a sizeable effect on business cycles, above and beyond their reflection of intra-industry trade and of openness to goods and assets trade. (iv) The simultaneous approach makes it possible to disentangle the impacts of both inter- and intra-industry trades. The estimated role of trade is in line with existing models once intra-industry trade is controlled for. Furthermore, trade-induced specialization has virtually no effect on cycles synchronization. The results obtain in a variety of datasets, measurement strategies and specifications. They relate to a recent strand of International Business Cycles models with incomplete markets and transport costs, and on the empirical side, point to an important omission in the list of criteria defining an Optimal Currency Area, namely specialization patterns.

Keywords: Trade, Specialization, Financial Openness, International Business Cycle, Optimal Currency Area

JEL Classification: F41, E32

Suggested Citation

Imbs, Jean M. and Imbs, Jean M., Trade, Finance, Specialization and Synchronization (February 2003). Available at SSRN: https://ssrn.com/abstract=382283 or http://dx.doi.org/10.2139/ssrn.382283

Jean M. Imbs (Contact Author)

Paris School of Economics (PSE) ( email )

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NYU Abu Dhabi ( email )

PO Box 129188
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United Arab Emirates

Centre for Economic Policy Research (CEPR) ( email )

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United Kingdom