Countries that trade more with each other exhibit higher business
cycle correlation. This paper examines the mechanisms underlying
this relationship using a large cross-country, industry-level panel
dataset of manufacturing production and trade. We show that sector
pairs that experience more bilateral trade exhibit stronger comovement.
Vertical linkages in production are an important explanation
behind this effect: bilateral international trade increases comovement
significantly more in cross-border industry pairs that use each other
as intermediate inputs. Our estimates imply that these vertical production
linkages account for some 30 percent of the total impact of
bilateral trade on the business cycle correlation. (JEL E32, F14, F43)
"Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement."
American Economic Journal: Macroeconomics,
Business Fluctuations; Cycles
Country and Industry Studies of Trade
Economic Growth of Open Economies