Comovement in GDP Trends and Cycles Among Trading PartnersI

It has long been recognized that business cycle comovement is greater between countries that trade more intensively with one another. Surprisingly, no one has previously examined the relationship between trade intensity and comovement of shocks to the trend level of output. Contrary to the result for cyclical fluctuations, we find that comovement of shocks to trend levels of real GDP is significantly weaker among countries that trade more intensively with one another. We also find that this relationship has remained stable, or become stronger in recent decades, while the role of trade in generating cyclical comovement has diminished over time. By examining the impact of trade linkages on both cyclical and trend comovement, we can quantify the effect of trade on overall output growth comovement between countries. We simulate changes in ten-year output growth correlations corresponding to the estimated effects of trade and find that the impact on trend comovement is quantitatively more important than its effect on cyclical comovement