How Much Do Trade and Financial Linkages Matter for Business Cycle Synchronization in a Small Economy?

BBVA Working Paper, No.0801

37 Pages Posted: 30 Apr 2018

See all articles by Alicia García-Herrero

Alicia García-Herrero

Bruegel; Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS); Natixis

Juan M. Ruiz

Banco de España - Department of International Economics

Date Written: November 1, 2006

Abstract

We analyze empirically whether trade and financial linkages between two countries increase the synchronization of their business cycles directly or indirectly. In a system of equations, we use a newly processed database on the bilateral linkages of a small open economy, namely Spain. We prefer this to the generally used US data, to avoid other channels of influence of such a large economy affecting the results. We find that both trade or financial linkages only foster synchronization of business cycles indirectly, by increasing the similarity of economic structure between countries, which itself induces more similar output movements. This result suggests that sectoral shocks, rather than intra-industry shocks, have prevailed in the last 15 years. The net effects of both trade and financial linkages on business cycle synchronization are statistically significant, but very small in economic terms. Common macroeconomic policies, instead, are much more important determinants of output co-movements.

Keywords: business cycle synchronization; trade linkages; financial linkages; productive structure; integration

JEL Classification: E32; F41; F12; E44

Suggested Citation

Garcia-Herrero, Alicia and Ruiz Perez, Juan Manuel, How Much Do Trade and Financial Linkages Matter for Business Cycle Synchronization in a Small Economy? (November 1, 2006). BBVA Working Paper, No.0801, Available at SSRN: https://ssrn.com/abstract=3160566 or http://dx.doi.org/10.2139/ssrn.3160566

Alicia Garcia-Herrero (Contact Author)

Bruegel ( email )

Rue de la Charité 33
B-1210 Brussels Belgium, 1210
Belgium

Hong Kong University of Science & Technology (HKUST) - HKUST Institute for Emerging Market Studies (IEMS) ( email )

IAS 2019, Lo Ka Chung Building,
Lee Shau Kee Campus, HKUST
Clear Water Bay, Kowloon
Hong Kong

Natixis ( email )

France

Juan Manuel Ruiz Perez

Banco de España - Department of International Economics ( email )

Alcala 48
28014 Madrid
Spain
+34 913384334 (Phone)
+34 913386212 (Fax)

HOME PAGE: http://www.eco.uc3m.es/~jruiz/

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