The E¤ects of Globalization on International Business Cycle Co-Movement: Is all Trade and Finance Created Equal?

This paper tests for the e¤ects of increased trade and …nancial integration on business cycle co-movement. Using both quantitative theory and a reduced form empirical approach motivated by the theory, I measure and explain the channels from bilateral trade integration, …nancial integration, and industrial specialization to cyclical co-movement. The model is also used to measure the causal channels between trade, …nance, and specialization. When trade integration is divided into intermediate and …nal goods trade, both the data and the model show that intermediate goods trade has a greater e¤ect on correlation than …nal goods trade. When …nancial integration is divided into credit market and capital market integration, the data predict that credit market integration has a positive e¤ect on cyclical co-movement but capital market integration has a negative e¤ect. However this constitutes a puzzle since the positive e¤ect of credit market integration on co-movement cannot be replicated by the model. JEL Classi…cation: C68, E32, F10, F30, F41