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Trade, finance or policies: what drives the cross-border spill-over of business cycles?

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  • Stracca, Livio
  • Montinari, Letizia

Abstract

In this paper we investigate how income growth rates in one country are affected by growth rates in partner countries, testing for the importance of pairwise country links as well as characteristics of the receiving country (trade and financial openness, exchange rate regime, fiscal variables). We find that trade integration fosters the spill-over of business cycles, both bilaterally and as a country characteristic (trade openness). Results for financial integration are mixed; financial links as pairwise country characteristic are either insignificant or negatively signed (indicating a dampening of cross country spill-overs), but financial openness as characteristic of the receiving country amplifies spill-overs. We find no evidence for a role of the exchange rate regime. Finally, we find that higher government spending and debt reduces countries JEL Classification: F1, F3, F41, F44

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  • Stracca, Livio & Montinari, Letizia, 2017. "Trade, finance or policies: what drives the cross-border spill-over of business cycles?," Working Paper Series 1993, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20171993
    Note: 335958
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    3. Sabrina Bunyan & David Duffy & George Filis & Ishmael Tingbani, 2020. "Fiscal policy, government size and EMU business cycle synchronization," Scottish Journal of Political Economy, Scottish Economic Society, vol. 67(2), pages 201-222, May.
    4. Nauro F. Campos & Jarko Fidrmuc & Iikka Korhonen, 2017. "Business Cycle Synchronisation in a Currency Union: Taking Stock of the Evidence," GRU Working Paper Series GRU_2017_017, City University of Hong Kong, Department of Economics and Finance, Global Research Unit.
    5. Sabrina Bunyan & David Duffy & George Filis & Ishmael Tingbani, 2018. "Bilateral business cycle synchronisation in the EMU: What is the role of fiscal policy and government size?," Working Papers 2018.02, International Network for Economic Research - INFER.
    6. Aharon, David Y. & Qadan, Mahmoud, 2022. "Infection, invasion, and inflation: Recent lessons," Finance Research Letters, Elsevier, vol. 50(C).
    7. Mao Takongmo, Charles-O. & Touré, Adam, 2023. "Trade openness and connectedness of national productions: Do financial openness, economic specialization, and the size of the country matter?," Economic Modelling, Elsevier, vol. 125(C).
    8. Carlo Gianelle & Letizia Montinari & Simone Salotti, 2017. "Interregional Trade, Specialization, and the Business Cycle: Policy Implications for the EMU," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 13(1), pages 1-27, May.
    9. Campos, Nauro F. & Jarko, Fidrmuc & Iikka, Korhonen, 2017. "Business cycle synchronisation in a currency union: Taking stock of the evidence," Bank of Finland Research Discussion Papers 28/2017, Bank of Finland.
    10. Croitorov, Olga & Giovannini, Massimo & Hohberger, Stefan & Ratto, Marco & Vogel, Lukas, 2020. "Financial spillover and global risk in a multi-region model of the world economy," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 185-218.
    11. Jakub Borowski & Adam Czerniak & Beáta Farkas, 2023. "Diverse Models of Capitalism and Synchronization of Business Cycles," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 65(4), pages 681-712, December.
    12. Avdjiev, Stefan & Binder, Stephan & Sousa, Ricardo, 2021. "External debt composition and domestic credit cycles," Journal of International Money and Finance, Elsevier, vol. 115(C).
    13. Hazwan Haini & Lutfi Abdul Razak & Pang Wei Loon & Sufrizul Husseini, 2023. "Re-examining the finance–institutions–growth nexus: does financial integration matter?," Economic Change and Restructuring, Springer, vol. 56(3), pages 1895-1924, June.
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    More about this item

    Keywords

    FDI; financial integration; gravity; growth spillovers; multi-country models; trade integration;
    All these keywords.

    JEL classification:

    • F1 - International Economics - - Trade
    • F3 - International Economics - - International Finance
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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