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Business Cycle Synchronisation: Disentangling Trade and Financial Linkages

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  • Stéphane Dées
  • Nico Zorell

Abstract

Drawing on a large cross-section of countries, this paper explores whether closer economic ties between countries foster business cycle synchronisation and disentangles the role of the various channels, including trade and financial linkages as well as the similarity in sectoral specialisation. Our results confirm that output comovement is higher for country pairs with closer trade linkages and similar patterns of sectoral specialisation. By contrast, it remains difficult to find a direct relationship between bilateral financial linkages and output correlation. However, our results suggest that financial integration spurs business cycle synchronisation indirectly by raising the similarity in sectoral specialisation. Notably, the main findings hold regardless of whether financial linkages are captured in terms of FDI or portfolio holdings. Copyright Springer Science+Business Media, LLC 2012

Suggested Citation

  • Stéphane Dées & Nico Zorell, 2012. "Business Cycle Synchronisation: Disentangling Trade and Financial Linkages," Open Economies Review, Springer, vol. 23(4), pages 623-643, September.
    • Handle: RePEc:kap:openec:v:23:y:2012:i:4:p:623-643
    DOI: 10.1007/s11079-011-9208-2
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    More about this item

    Keywords

    International transmission of shocks; Financial integration; International business cycle; E32; F41; E44;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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