Trade Integration and Business Cycle Convergence: Is the Relation Robust Across Time and Space?

Abstract

This thesis investigates the relationship between business cycle correlation and trade intensity for a group of 24 countries over the period 1959 to 2003.Previous studies have not accounted for the possibility that the business cycle correlation may be influenced by unobservable country pair specific effects. Our estimates are produced using both fixed and random effects procedures and allow for the possibility that trade intensity could be endogenous. Both methodologies suggest that the greater economic convergence is strongly influenced by rises in bilateral trade intensity. A couple of sensitivity analyses prove that the relationship is robust, such as sub-period analysis or adding potential omitted variables.However, the magnitude and significance of the estimated relationship is not the same for all countries. Our evidence indicates that trade amongst the European countries has had the most beneficial effect on business cycle co-movements which, from optimum currency area (OCA) theory, would support the decision of most of these economies to join European Monetary Union (EMU). But all non-European countries (except China) have not shown positive or significant relationships.In addition, the determinants of business cycle co-movements are extended to trade intensity, industry specialisation and financial integration for a sample of 15 OECD countries from 1984 to 2003. We still find the positive and statistically significant impact from trade intensity on business cycle synchronisation. Moreover, economic regions with strong financial links are significantly less synchronised and more similar industry structure results in highly correlated business cycle.

Date of Award	1 Aug 2007
Original language	English
Awarding Institution	University of Bath
Supervisor	Andrew Abbott (Supervisor) & Joshy Easaw (Supervisor)