Can the Standard International Business Cycle Model Explain the Relation Between Trade and Comovement?

October 1, 2005

Preview Citation

Format: Chicago

Kei-Mu Yi, and Ayhan Kose. Can the Standard International Business Cycle Model Explain the Relation Between Trade and Comovement?, (USA: International Monetary Fund, 2005) accessed September 19, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures, complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country-pairs are small with respect to the rest of the world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country pair's business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model.

Subject: Business cycles, Consumption, Economic growth, International trade, National accounts, Plurilateral trade, Production, Total factor productivity, Transportation

Keywords: Business cycle, Business cycles, Consumption, Free trade, GDP correlation, Intensity level, International business cycle comovement, International trade, Log trade specification, Plurilateral trade, Total factor productivity, Trade intensity, Transport cost, Transportation, WP

Publication Details

Pages:

40
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2005/204
Stock No:

WPIEA2005204
ISBN:

9781451862232
ISSN:

1018-5941

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