Business Cycle Co-movement and Trade Intensity in the Euro Area: is there a Dynamic Link?Refereed Journal
This paper extends the recent literature that exclusively looks at the static link between bilateral trade intensity and business cycle synchronisation. A cross section augmented VAR framework with an unobservered common factor structure is used in order to apply the concept of Granger causality to test for dynamic links between variables. I conclude that although countries with intensive trade linkages also tend to have more similar business cycles in the long-run, the trade channel does not help to explain much of the short-run variation of business cycle co-movement in the euro area. The common factors have high predictive power for both business cycle co-movement and bilateral trade intensity. Thus, the paper provides evidence for the common shock view on business cycle synchronisation.
Kappler, Marcus (2011), Journal of Economics and Statistics (Jahrbücher für Nationalökonomie und Statistik) 231/2 , 247-265