Trade, Finance, Specialization and Synchronization

I investigate the determinants of business cycles synchronization, across regions and over time. I use both international and intranational data to evaluate the linkages between trade in goods, trade in ...nancial assets, specialization and business cycles synchronization in the context of a system of simultaneous equations. In all speci...cations, the results are as follows. (i) Simultaneity is important, as both trade and ...nancial openness have a direct and an indirect e¤ect on cycles synchronization. (ii) Countries with liberalized capital accounts (and States with high degree of risk sharing) are signi...cantly more synchronized, even though they are also more specialized. (iii) Specialization patterns have a sizeable e¤ect on business cycles, above and beyond their re‡ection of intra-industry trade and of openness to goods and assets trade. (iv) The role of trade, in turn, is in line with existing models once intra-industry trade is controlled for. Furthermore, trade-induced specialization has virtually no e¤ect on cycles synchronization. The results obtain in a variety of cross-sections and panels. They relate to a recent strand of International Business Cycles models with incomplete markets and transport costs, and on the empirical side, point to an important omission in the list of criteria de...ning an Optimal Currency Area, namely specialization patterns. JEL Classi...cation Numbers: F41, E32.