Common Trade Exposure and Business Cycle Comovement

Publicado: 
Clasificación JEL: 
E32, F1, F41, F44

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Luis E. Arango, Leonardo Bonilla-Mejía, Luz Adriana Flórez, Luis E. Arango

Julián Andrés Parra-Polanía, Constanza Martínez-Ventura

Edgar Caicedo-García, Jorge Enrique Ramos-Forero, Hernán Rincón-Castro, Hector Manuel Zárate-Solano

Bilateral trade is considered a key driver of business-cycle transmission, as countries with higher bilateral trade have more correlated business cycles. We show, however, that when we account for the common trade exposure of a country pair to similar foreign cycles, the effect of bilateral trade on comovement falls sharply. Furthermore, common trade exposure is also a robust predictor of comovement. We conclude that trade is indeed a driver of business-cycle transmission, but often through common exposure to foreign cycles rather than just bilateral linkages. Finally, we consider the implications of these empirical results for the “trade-comovement puzzle.”