Trade, Finance, Specialization and Synchronization

48 Pages Posted: 20 May 2003  

Jean M. Imbs

Paris School of Economics (PSE); Centre for Economic Policy Research (CEPR); Swiss Finance Institute

Multiple version iconThere are 3 versions of this paper

Date Written: April 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 of 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: Specialization, financial openness, trade, international business cycle, optimal currency area

JEL Classification: E32, F41

Suggested Citation

Imbs, Jean M., Trade, Finance, Specialization and Synchronization (April 2003). CEPR Discussion Paper No. 3779. Available at SSRN: https://ssrn.com/abstract=410020

Jean M. Imbs (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Swiss Finance Institute ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

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