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Business Cycle Synchronisation: Disentangling Trade and Financial Linkages

Stephane Dees () and Nico Zorell

Open Economies Review, 2012, vol. 23, issue 4, 623-643

Abstract: Drawing on a large cross-section of countries, this paper explores whether closer economic ties between countries foster business cycle synchronisation and disentangles the role of the various channels, including trade and financial linkages as well as the similarity in sectoral specialisation. Our results confirm that output comovement is higher for country pairs with closer trade linkages and similar patterns of sectoral specialisation. By contrast, it remains difficult to find a direct relationship between bilateral financial linkages and output correlation. However, our results suggest that financial integration spurs business cycle synchronisation indirectly by raising the similarity in sectoral specialisation. Notably, the main findings hold regardless of whether financial linkages are captured in terms of FDI or portfolio holdings. Copyright Springer Science+Business Media, LLC 2012

Keywords: International transmission of shocks; Financial integration; International business cycle; E32; F41; E44 (search for similar items in EconPapers)
Date: 2012
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