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This paper studies the determinants of the international synchronization of business cycles. Surprisingly, countries that trade more do not appear to have more synchronized cycles once other factors are accounted for. On the other hand, the extent of co-fluctuations increases quite robustly with the income level, so that two rich countries are unconditionally more synchronized. We develop a model where this happens because the world moves from an unstable steady state with full international specialization to a stable symmeric one. Similar countries produce similar goods and as a result experience sectoral shocks that are of equal importance. By contrast, di¤erent income levels reflect differences in production patterns, where the North produces manufactures and the South agricultural goods. Since there is no particular reason why stochastic developments in those two sectors should be correlated with one another, we should expect less cyclical comovement between a rich and a poor country. Finally, the model is consistent with the tendency for trade amongst developed countries to be mostly intra-industry.

This paper investigates the effects of fixed versus flexible exchange rates on firms’ location choices and on countries ’ specialization patterns. In a two-country, twodifferentiated-goods monetary model, uncertainty arises after wages are set and prices are optimally chosen. The paper shows that countries are more specialized under flexible than fixed rates, which indicates that the pattern of specialization is not uniquely defined by trade models but also depends on the exchange rate regime. The creation of a currency area endogenously increases the desirability of such an area by reducing the asymmetry of shocks across member countries. The results also shed light on the effects of exchange rate variability on trade. [JEL F1, F31, F33, F4, L16, R12] In the presence of price rigidities, countries tend to be more specialized under flexible exchange rates than under fixed exchange rates, thus suggesting that the pattern of specialization indicated by any trade model is not unique but also depends *Previous drafts of this paper were written when Luca Antonio Ricci was a Visiting Fellow at Harvard University and at the University of Konstanz. He is grateful to Joshua Aizenman, Richard Baldwin, Olivier

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We examine the patterns and determinants of business cycle correlations among 11 UK regions and six euro-zone countries over the 1966–97 period, using the generalized method of moments to allow for sampling error in comparing estimated correlations. The British business cycle is found to be persistently out of phase with that of the main euro-zone economies, and the trend is towards lower correlations. We detect only minor cyclical heterogeneity among UK regions. Differences in sectoral specialization drive some of the asymmetry in GDP fluctuations, but they do not appear significant in explaining the observed reduction in UK–EU business cycle correlations over time. 1

The stubbornly asynchronous nature of UK and EU business cycles is often said to set the UK economy apart from its continental neighbours, and in particular to raise the cost of UK participation in the single currency prohibitively. We employ regional and sector-level data to estimate the degree of within-country heterogeneity of cycles and compare UK regional cycles with those of selected Euro zone countries. An examination of cross-correlation coefficients between 1966 and 1997 reveals that there have been considerable regional differences in intra-UK cyclical co-movements and in the evolution of correlations between UK regions and Europe. We study the determinants of co-fluctuations and focus, as the main explanatory variables, on the patterns and changes in sectoral structures across regions and countries and exchange rate variability. The differences in industrial structures appear to be the most significant variable while the exchange rate display mixed results. The size of the r...

As trade integration deepens in East Asia, it is expected that there will be closer links in business cycles among East Asian countries. Theoretically, however, increased trade can lead business cycles across trading partners to shift in either direction: while inter-industry trade resulting in higher specialization would induce less synchronization, intra-industry trade could overturn this tendency. By using the data for twelve Asian economies, this paper finds that intra-industry trade is the major channel through which business cycles become synchronized among Asian economies, although increased trade itself does not necessarily lead to close business cycle coherence. This result has important implications for the prospects of a currency union in the region.

This paper investigates the determinants of business cycle comovement between countries. Our dataset includes over 100 countries, both developed and developing. We search for variables that are “robust ” in explaining comovement, using the approach of Leamer (1983). Variables considered are (i) bilateral trade between countries; (ii) total trade in each country; (iii) sectoral structure; (iv) similarity in export and import baskets; (v) factor endowments; and (vi) gravity variables. We find that bilateral trade is robust. However, two variables that the literature has argued are important for business cycles—industrial structure and currency unions—are found

Policy provides a framework for the presentation and development of ideas and research that can constitute the basis for informed policy-making in any area to which economic reasoning can make a contribution. No particular areas have been prioritized against others, nor is there any preference for “near-policy” treatments. Accordingly, the scope and style of papers in the series is varied. Visitors invited to the Institute under the auspices of the Centre’s Programme, as well as researchers at the Institute, are eligible to contribute. RSC 2000/67 © 2000 M.J. ArtisAbstract * The paper analyses some of the arguments put forward in the Chancellor's "Five Tests " for joining the EMU. It emphasizes that economic analysis provides a cost-benefit framework, whilst recognizing that EMU is a political enterprise. A positive decision on entry to EMU could be accompanied by some attempts to mitigate the economic costs, thus enhancing the net benefits of membership.