TRADE NETWORKING AND BUSINESS CYCLE SYNCHRONISATION

Abstract

Recent studies have shown a growing tendency for trade to have an undetected effect on business cycle synchronisation. This seems to be due to an increase in the analysis comprising data from developing countries, advances in the control of the endogeneity of trade variables using instrumental variables, and the use of various control variables as explanatory variables other than trade variables. This study examines how the networking of trade, in which numerous countries participate, changes the relationship between trade and business cycle synchronisation in two countries. Thus, we examine the possibility that business cycle linkage would increase if countries with common trading partners had the same impact on each other from a third country rather than having a direct impact on each other. The analysis results indicate that trade networking enhances business cycle linkages, but bilateral trade has no such effects. This result is confirmed when tradables are divided into final and intermediate goods.