Trade, Finance, Specialization, and Synchronization

I investigate the determinants of business cycle synchronization across regions. The linkages between trade in goods, financial openness, specialization, and business cycle synchronization are evaluated in the context of a system of simultaneous equations. The main results are as follows. (i) Specialization patterns have a sizable effect on business cycles. Most of this effect is independent of trade or financial policy, but directly reflects differences in GDP per capita. (ii) A variety of measures of financial integration suggest that economic regions with strong financial links are significantly more synchronized, even though they also tend to be more specialized. (iii) The estimated role of trade is closer…