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Have Business Cycles Become More Synchronous After NAFTA?

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  • Vatsa, Puneet

    (Lincoln University)

Abstract

Trade agreements do not necessitate business cycle comovement. Focusing on NAFTA, we investigate whether business cycles in Canada, Mexico, and the US have become more synchronous after the landmark trade agreement came into effect in 1994. To this end, using the newly-developed Hamilton filter, we decompose the real GDPs of the three countries to derive their business cycle components; then, we conduct time-difference analyses, which illuminate correlations at different time intervals, to study business cycle synchronization. We find that business cycles in Mexico and the US have become positively correlated after NAFTA—they were weakly and negatively correlated during the pre-NAFTA period. Contrastingly, correlations amongst the US and Canadian business cycles have weakened during the post-NAFTA period; nevertheless, these two countries' business cycles continue to be tightly and positively correlated. The oft-used Hodrick-Prescott filter is utilized to confirm the robustness of the results—the two filters lead to similar conclusions.

Suggested Citation

  • Vatsa, Puneet, 2021. "Have Business Cycles Become More Synchronous After NAFTA?," American Business Review, Pompea College of Business, University of New Haven, vol. 24(1), pages 54-66, May.
    • Handle: RePEc:ris:ambsrv:0026
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    More about this item

    Keywords

    NAFTA; Business Cycles; Hamilton Filter; Hodrick-Prescott Filter;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F15 - International Economics - - Trade - - - Economic Integration

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