Do Trade and Financial Linkages Foster Business cycle Synchronization in a small economy?

Alicia Garcia-Herrero and Juan Ruiz
Authors registered in the RePEc Author Service: Alicia Garcia Herrero

No 801, Working Papers from BBVA Bank, Economic Research Department

Abstract: We estimate a system of equations to analyze whether bilateral trade and financial linkages influence business cycle synchronization directly and/or indirectly. Our paper builds upon the existing literature by using bilateral trade and financial flows for a small, open economy (Spain) as benchmark for the results, instead of the US as generally done in the literature. We find that both the similarity of productive structure and trade links promote the synchronization of cycles. However, bilateral financial links are inversely related to the co-movement of output. This might point to financial integration allowing an easier transfer of resources between two economies, which could enable their decoupling, as predicted by a standard model of international business cycles. Both the effects of trade and financial links on output synchronization are statistically significant and economically relevant.

Keywords: business cycle synchronization; trade linkages; financial linkages; productive structure; integration (search for similar items in EconPapers)
JEL-codes: E32 E44 F12 F41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2008-01
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Citations: View citations in EconPapers (39)

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Working Paper: Do trade and financial linkages foster business cycle synchronization in a small economy? (2008)
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