Trade Integration and Business Cycle Synchronization in the EMU: the Negative Effect of New Trade Flows

Jean-Sébastien Pentecôte (1) , Jean-Christophe Poutineau (1) , Fabien Rondeau (1)

1 CREM - Centre de recherche en économie et management

This paper questions the impact of trade integration on business cycle sychroniza-tion in the EMU by distinguishing increase of existing trade flows (the intensive margin) and creation of new trade flows (the extensive margin). Using a DSGE model, we find that synchronization is weakened when new firms are allowed to export as a response to productivity gains. Consistenly with our model and using disaggregated data over 1995-2007 for the 11 founding members of the EMU, we find that trade intensity has a positive direct effect while new trade flows have a negative effect on business cycle synchronization. Furthermore, new flows play essentially an indirect role by intensifying specialization and explain 60% of the overall effect of trade intensity and specialization on synchronization.

Domaines: Economies et finances

Jean-Sébastien Pentecôte, Jean-Christophe Poutineau, Fabien Rondeau. Trade Integration and Business Cycle Synchronization in the EMU: the Negative Effect of New Trade Flows. Open Economies Review, 2015, 26 (1), pp.61-79. ⟨10.1007/s11079-014-9318-8⟩. ⟨hal-02440559⟩