Standard international transmission mechanism of productivity shocks predicts a weak endogenous linkage between trade and business cycle synchronization: a problem known as the trade-comovement puzzle. We provide the foundational analysis of the puzzle, pointing to three natural candidate resolutions: (i) financial market frictions, (ii) Greenwood-Hercowitz-Huffman preferences, and (iii) dynamic trade elasticity that is low in the short run but high in the long run. We show the effects of each of these candidate resolutions analytically and evaluate them quantitatively. We find that while (i) and (ii) fall short of the data, (iii) goes a long way toward resolving the puzzle.
Drozd, Lukasz A., Sergey Kolbin, and Jaromir B. Nosal.
"The Trade-Comovement Puzzle."
American Economic Journal: Macroeconomics,
Business Fluctuations; Cycles
Empirical Studies of Trade
International Business Cycles