Trade Integration and Business Cycle Convergence: Is the Relation Robust Across Time and Space?

This thesis investigates the relationship between business cycle correlationand trade intensity for a group of 24 countries over the period 1959 to 2003.Previous studies have not accounted for the possibility that the businesscycle correlation may be influenced by unobservable country pair specificeffects. Our estimates are produced using both fixed and random effectsprocedures and allow for the possibility that trade intensity could beendogenous. Both methodologies suggest that the greater economicconvergence is strongly influenced by rises in bilateral trade intensity. Acouple of sensitivity analyses prove that the relationship is robust, such assub-period analysis or adding potential omitted variables.However, the magnitude and significance of the estimated relationship isnot the same for all countries. Our evidence indicates that trade amongstthe European countries has had the most beneficial effect on business cycleco-movements which, from optimum currency area (OCA) theory, wouldsupport the decision of most of these economies to join European MonetaryUnion (EMU). But all non-European countries (except China) have notshown positive or significant relationships.In addition, the determinants of business cycle co-movements are extendedto trade intensity, industry specialisation and financial integration for asample of 15 OECD countries from 1984 to 2003. We still find the positiveand statistically significant impact from trade intensity on business cyclesynchronisation. Moreover, economic regions with strong financial links aresignificantly less synchronised and more similar industry structure results inhighly correlated business cycle.