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

IMF Working Papers, October 1, 2005

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

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Bibliographic details

• Authors: Kei-Mu Yi, Ayhan Kose
• Published: October 1, 2005
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451862232.001

Overview

• Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles.
• This paper assesses whether the standard international business cycle framework can replicate this empirical relation.
• Authors: Kei-Mu Yi, Ayhan Kose
• Publication date: October 1, 2005

Methodology

• Model: a three-country model with transportation costs.
• Asset market structures analyzed:
  • Complete markets
  • International financial autarky
• Simulations examine effects of increased goods market integration and additional scenarios affecting comovement.

Key findings

• Under both asset market structures the model can generate stronger correlations for pairs of countries that trade more.
• The magnitude of the increased correlation produced by the model falls far short of the empirical findings.
• Controlling for the fact that most country-pairs are small with respect to the rest of the world does not close the gap between model predictions and empirical evidence.

Additional simulations and channels explored

• Simulations that allow for:
  • Increased trade with the third country
  • Increased TFP shock comovement
• These simulations highlight channels that could narrow the gap between empirical findings and the model's predictions, but do not eliminate the shortfall identified.

Subjects and keywords (as listed)

• Subjects: 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

Content in this bundle

• Appendix I. Productivity Shock Process and Import Shares
  • Appendix I. Productivity Shock Process and Import Shares (Markdown version)
  • Appendix I. Productivity Shock Process and Import Shares (PDF)