Trade in Intermediate Inputs and Business Cycle Comovement

In data, bilateral trade is strongly correlated with bilateral GDP comovement. This paper examines whether trade in intermediate inputs explains this empirical fact. I integrate input trade into a many country, multi-sector model and calibrate the model to data on bilateral input-output linkages. With estimated productivity shocks, the model generates an aggregate trade-comovement correlation 30-40% as large as in data. This moderate aggregate correlation emerges because the model matches observed correlations of goods production well, but fails to match services correlations. With independent shocks across countries, the model accounts for one-quarter of the trade-comovement relationship for gross output of goods. However, because shocks are transmitted through input linkages, they synchronize gross output, not value added. Moreover, contrary to conventional wisdom, input complementarity does not reconcile model and data. Finally, using simulated data, I argue that caution is needed in interpreting trade-comovement regressions that include proxies for vertical linkages. ∗Economics Department, Dartmouth College, [email protected]. I thank Rudolfs Bems, Andrew Bernard, Stefania Garetto, Jean Imbs, Luciana Juvenal, Esteban Rossi-Hansberg, Nina Pavcnik, and Kei-Mu Yi for helpful conversations, as well as participants in presentations at the Dallas Federal Reserve, Johns Hopkins (SAIS), Penn State, Stanford, the St. Louis Federal Reserve, UC Santa Cruz, the 2011 AEA meetings, and the 2010 EIIT Conference.