This paper is an empirical study of the determinants of business-cycle comovement. Using a panel of European countries (1972-2004) it is found that bilateral trade intensity is a robust determinant of real comovement in Europe, this confirming the seminal study by Frankel and Rose (1998). It is also found that convergence in macroeconomic policies (especially fiscal policies) is associated to high degree of intra-european business-cycle correlation. Moreover, having controlled for policy convergence, the effect of bilateral trade on business cycle comovement weakens on average by a factor of 36%-33% with respect to that estimated according to Frankel and Roseâ€™s econometric specification, this suggesting the potential endogeneity of the set of instrumental variables adopted by the two authors (Gruben, Koo and Millis, 2002).
|Original language||English (US)|
|Number of pages||38|
|Journal||Rivista di Politica Economica|
|State||Published - 2006|