Trade, Finance, Specialization, and Synchronization

42 Pages Posted: 29 Jan 2006

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: April 2003

Abstract

The paper investigates the determinants of business cycles synchronization across regions. It uses both international and intranational data to evaluate the linkages between trade in goods, trade in financial assets, specialization and business cycles synchronization using a system of simultaneous equations. The results are as follows: (i) Simultaneity is important, as both trade and financial openness have a direct and an indirect effect on cycle synchronization. (ii) A variety of alternative measures of financial integration suggest that regions with strong financial links are significantly more synchronized, though they are also more specialized. (iii) Specialization patterns have a sizable effect on business cycles, beyond their reflection of intra-industry trade, and of openness to goods and assets trade. (iv) The estimated role of trade is in line with existing models once intra-industry trade is controlled for. The results relate to a recent strand of international business cycle models with incomplete markets and transport costs, and, on the empirical side, point to an important omission in the usual 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 (April 2003). IMF Working Paper No. 03/81, Available at SSRN: https://ssrn.com/abstract=879157

Jean M. Imbs (Contact Author)

Paris School of Economics (PSE) ( email )

48 Boulevard Jourdan
Paris, 75014 75014
France

NYU Abu Dhabi ( email )

PO Box 129188
Abu Dhabi
United Arab Emirates

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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