Trade and Business-Cycle Comovement: Evidence from the EU

This paper is an empirical study of the determinants of
business-cycle comovement. Using a panel of European countries
(1972-2004) it is found that bilateral trade intensity is a robust
determinant of real comovement in Europe, this confirming the
seminal study by Frankel and Rose (1998). It is also found that
convergence in macroeconomic policies (especially fiscal policies)
is associated to high degree of intra-european business-cycle
correlation. Moreover, having controlled for policy convergence, the
effect of bilateral trade on business cycle comovement weakens on
average by a factor of 36%-33% with respect to that estimated
according to Frankel and Rose’s econometric specification, this
suggesting the potential endogeneity of the set of instrumental
variables adopted by the two authors (Gruben, Koo and Millis,
2002). [JEL Classification: F15, F33, E32]

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