Title: Can the standard international business cycle model explain the relation between  trade and comovement?
Description: "Recent empirical research finds that  pairs of countries with stronger trade linkages tend to have more highly  correlated business cycles.  The authors assess whether the standard  international business cycle framework can replicate this intuitive result.   They employ a three-country model with transportation costs, and they simulate  the effects of increased goods market integration under two asset market  structures: complete markets and international financial autarky.  The main  finding is that under both asset market structures the model can generate  stronger correlations for pairs of countries that trade more, but the increased  correlation falls far short of the empirical findings.  Even when the authors  control for the fact that most country pairs are small with respect to the rest  of the world, the model continues to fall short.  They also conduct additional  simulations that allow for increased trade with the third country or increased  TFP shock comovement to affect the country pair's business cycle  comovement.  These simulations are helpful in highlighting channels that could  narrow the gap between the empirical findings and the predictions of the  model"--Federal Reserve Bank of Philadelphia web site.
Subjects: International business enterprises, International trade