Trade in Intermediate Inputs and Business Cycle Comovement
Does input trade synchronize business cycles across countries? I incorporate input trade into a dynamic multi-sector model with many countries, calibrate the model to match bilateral input-output data, and estimate trade-comovement regressions in simulated data. With correlated productivity shocks, the model yields high trade- comovement correlations for goods, but near-zero correlations for services and thus low aggregate correlations. With uncorrelated shocks, input trade generates more comovement in gross output than real value added. Goods comovement is higher when (a) the aggregate trade elasticity is low, (b) inputs are more substitutable than final goods, and (c) inputs are substitutable for primary factors.
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An online appendix is available for this publication.
This paper was revised on June 8, 2014
Document Object Identifier (DOI): 10.3386/w18240
forthcoming in The American Economic Journal: Macroeconomics
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