Does More International Trade Result in Highly Correlated Business Cycles? by

This paper investigates whether trade intensity is a determinant of business cycle correlations. We find that the greater economic convergence experienced by a sample of 24 countries from 1959 to 2003 is strongly influenced by the increased amount of bi-lateral trade they have undertaken. However, the magnitude and significance of the estimated relationship is not the same for all countries. Our evidence indicates that trade amongst the European countries has had the most beneficial effect on business cycle comovements, which from optimal currency area (OCA) theory would support the decision of most of these economies to join European Monetary Union (EMU).