Trade, Finance, Specialization and Synchronization

I investigate the determinants of business cycles synchronization across regions. The linkages between trade in goods, Þnancial openness, specialization and business cycles synchronization are evaluated in the context of a system of simultaneous equations. The main results are as follows. (i) Specialization patterns have a sizeable impact on business cycles. Most of this effect is inde-pendent from trade or Þnancial policy, but directly reßects differences in GDP per capita. (ii) A variety of measures of Þnancial integration suggest that eco-nomic regions with strong Þnancial links are signiÞcantly more synchronized, even though they also tend to be more specialized. (iii) The estimated role of trade is closer to that implied by existing models once intra-industry trade is held constant. The results obtain in a variety of datasets, measurement strate-gies and speciÞcations. They relate to a recent strand of International Business Cycles models with incomplete markets and transport costs, and on the em-pirical side, point to an important omission in the list of criteria deÞning an Optimal Currency Area, namely specialization patterns