Trade, Finance, Specialization, and Synchronization

42 Pages Posted: 29 Jan 2006  

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

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., Trade, Finance, Specialization, and Synchronization (April 2003). IMF Working Paper, Vol. , pp. 1-42, 2003. 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

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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