Trade in Intermediate Inputs and Business Cycle Comovement [report]

Robert Johnson
2012 unpublished
In data, bilateral trade is strongly correlated with bilateral GDP comovement. This paper examines whether trade in intermediate inputs explains this empirical fact. I integrate input trade into a many country, multi-sector model and calibrate the model to data on bilateral input-output linkages. With estimated productivity shocks, the model generates an aggregate trade-comovement correlation 30-40% as large as in data. This moderate aggregate correlation emerges because the model matches
more » ... model matches observed correlations of goods production well, but fails to match services correlations. With independent shocks across countries, the model accounts for one-quarter of the trade-comovement relationship for gross output of goods. However, because shocks are transmitted through input linkages, they synchronize gross output, not value added. Moreover, contrary to conventional wisdom, input complementarity does not reconcile model and data. Finally, using simulated data, I argue that caution is needed in interpreting trade-comovement regressions that include proxies for vertical linkages.
doi:10.3386/w18240 fatcat:deygows44zcipo7xfeqyb3pjom