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

Can the Standard International Business Cycle Model Explain the Relation Between Trade and Comovement?
Author: M. Ayhan Kose
Publisher:
Total Pages: 0
Release: 2019
Genre:
ISBN:

Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. The authors assess whether the standard international business cycle framework can replicate this intuitive result. They employ a three-country model with transportation costs, and they simulate the effects of increased goods market integration under two asset market structures: complete markets and international financial autarky. The 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 the authors control for the fact that most country pairs are small with respect to the rest of the world, the model continues to fall short. They 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.

Global Business Cycles

Global Business Cycles
Author: Mr.Ayhan Kose
Publisher: International Monetary Fund
Total Pages: 51
Release: 2008-06-01
Genre: Business & Economics
ISBN: 1451870019

This paper analyzes the evolution of the degree of global cyclical interdependence over the period 1960-2005. We categorize the 106 countries in our sample into three groups-industrial countries, emerging markets, and other developing economies. Using a dynamic factor model, we then decompose macroeconomic fluctuations in key macroeconomic aggregates-output, consumption, and investment-into different factors. These are: (i) a global factor, which picks up fluctuations that are common across all variables and countries; (ii) three group-specific factors, which capture fluctuations that are common to all variables and all countries within each group of countries; (iii) country factors, which are common across all aggregates in a given country; and (iv) idiosyncratic factors specific to each time series. Our main result is that, during the period of globalization (1985-2005), there has been some convergence of business cycle fluctuations among the group of industrial economies and among the group of emerging market economies. Surprisingly, there has been a concomitant decline in the relative importance of the global factor. In other words, there is evidence of business cycle convergence within each of these two groups of countries but divergence (or decoupling) between them.

Trade Linkages and International Business Cycle Comovement: Evidence from Korean Industry Data

Trade Linkages and International Business Cycle Comovement: Evidence from Korean Industry Data
Author: Dongyeol Lee
Publisher: International Monetary Fund
Total Pages: 25
Release: 2019-05-24
Genre: Business & Economics
ISBN: 1498315844

Through the 2000s, Korea’s export and import linkages to advanced and emerging markets increased significantly. At the same time, the correlation of output growth between Korea and these economies rose. This paper investigates the nature of the link between trade linkages and the comovement of international business cycles (BC) using Korean industry-level domestic and international input-output data. The results suggest that, at the industry-level, higher export linkages lead to a larger positive GDP growth comovement, while higher import linkages lead to higher negative employment growth comovement. Furthermore, the decomposition of aggregate BC comovement shows that the increase in trade with China has contributed the most to aggregate BC comovement, while the impact of trade linkages on BC comovement is propagated domestically via vertical linkages. These findings suggest that the Korean economy can be significantly affected by a few countries that are highly linked through trade to Korea and/or a few industries that are highly interconnected to other industries.

Technology Shocks and Aggregate Fluctuations

Technology Shocks and Aggregate Fluctuations
Author: Mr.Pau Rabanal
Publisher: International Monetary Fund
Total Pages: 68
Release: 2004-12-01
Genre: Business & Economics
ISBN: 1451875657

Our answer: Not so well. We reached that conclusion after reviewing recent research on the role of technology as a source of economic fluctuations. The bulk of the evidence suggests a limited role for aggregate technology shocks, pointing instead to demand factors as the main force behind the strong positive comovement between output and labor input measures.

What Happens During Recessions, Crunches and Busts?

What Happens During Recessions, Crunches and Busts?
Author: Mr.Ayhan Kose
Publisher: International Monetary Fund
Total Pages: 77
Release: 2008-12-01
Genre: Business & Economics
ISBN: 1451871325

We provide a comprehensive empirical characterization of the linkages between key macroeconomic and financial variables around business and financial cycles for 21 OECD countries over the period 1960–2007. In particular, we analyze the implications of 122 recessions, 112 (28) credit contraction (crunch) episodes, 114 (28) episodes of house price declines (busts), 234 (58) episodes of equity price declines (busts) and their various overlaps in these countries over the sample period. Our results indicate that interactions between macroeconomic and financial variables can play major roles in determining the severity and duration of recessions. Specifically, we find evidence that recessions associated with credit crunches and house price busts tend to be deeper and longer than other recessions. JEL Classification Numbers: E32; E44; E51; F42

Frontiers of Business Cycle Research

Frontiers of Business Cycle Research
Author: Thomas F. Cooley
Publisher: Princeton University Press
Total Pages: 452
Release: 1995-02-26
Genre: Business & Economics
ISBN: 9780691043234

This introduction to modern business cycle theory uses a neoclassical growth framework to study the economic fluctuations associated with the business cycle. Presenting advances in dynamic economic theory and computational methods, it applies concepts to t

Trade Integration and Business Cycle Synchronization

Trade Integration and Business Cycle Synchronization
Author: Mr.Romain A Duval
Publisher: International Monetary Fund
Total Pages: 46
Release: 2014-04-03
Genre: Business & Economics
ISBN: 1475523599

This paper reexamines the relationship between trade integration and business cycle synchronization (BCS) using new value-added trade data for 63 advanced and emerging economies during 1995–2012. In a panel framework, we identify a strong positive impact of trade intensity on BCS—conditional on various controls, global common shocks and country-pair heterogeneity—that is absent when gross trade data are used. That effect is bigger in crisis times, pointing to trade as an important crisis propagation mechanism. Bilateral intra-industry trade and trade specialization correlation also appear to increase co-movement, indicating that not only the intensity but also the type of trade matters. Finally, we show that dependence on Chinese final demand in value-added terms amplifies the international spillovers and synchronizing impact of growth shocks in China.

Power Laws in Firm Size and Openness to Trade

Power Laws in Firm Size and Openness to Trade
Author: Mr.Andrei A. Levchenko
Publisher: International Monetary Fund
Total Pages: 33
Release: 2010-04-01
Genre: Business & Economics
ISBN: 1455200689

Existing estimates of power laws in firm size typically ignore the impact of international trade. Using a simple theoretical framework, we show that international trade systematically affects the distribution of firm size: the power law exponent among exporting firms should be strictly lower in absolute value than the power law exponent among non-exporting rms. We use a dataset of French firms to demonstrate that this prediction is strongly supported by the data. While estimates of power law exponents have been used to pin down parameters in theoretical and quantitative models, our analysis implies that the existing estimates are systematically lower than the true values. We propose two simple ways of estimating power law parameters that take explicit account of exporting behavior.

World Development Report 2020

World Development Report 2020
Author: World Bank
Publisher: World Bank Publications
Total Pages: 511
Release: 2019-11-19
Genre: Business & Economics
ISBN: 1464814953

Global value chains (GVCs) powered the surge of international trade after 1990 and now account for almost half of all trade. This shift enabled an unprecedented economic convergence: poor countries grew rapidly and began to catch up with richer countries. Since the 2008 global financial crisis, however, the growth of trade has been sluggish and the expansion of GVCs has stalled. Meanwhile, serious threats have emerged to the model of trade-led growth. New technologies could draw production closer to the consumer and reduce the demand for labor. And trade conflicts among large countries could lead to a retrenchment or a segmentation of GVCs. World Development Report 2020: Trading for Development in the Age of Global Value Chains examines whether there is still a path to development through GVCs and trade. It concludes that technological change is, at this stage, more a boon than a curse. GVCs can continue to boost growth, create better jobs, and reduce poverty provided that developing countries implement deeper reforms to promote GVC participation; industrial countries pursue open, predictable policies; and all countries revive multilateral cooperation.

When and How to Adjust Beyond the Business Cycle? A Guide to Structural Fiscal Balances

When and How to Adjust Beyond the Business Cycle? A Guide to Structural Fiscal Balances
Author: Fabian Bornhorst
Publisher: International Monetary Fund
Total Pages: 39
Release: 2011-04-11
Genre: Business & Economics
ISBN: 1475510209

Technical Notes and Manuals are produced by IMF departments to expand the dissemination of their technical assistance advice. These papers present general advice and guidance, drawn in part from unpublished technical assistance reports, to a broader audience. This new series was launched in August 2009.