Production fragmentation and business-cycle comovement

International trade increasingly involves trade in goods being produced in fragmentation arrangements across countries, with each country specializing in different stages of a production sequence. This paper examines empirically whether pairs of countries with more bilateral production fragmentation...

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Bibliographic Details
Published in:Journal of international economics 2010-09, Vol.82 (1), p.1-14
Main Author: Ng, Eric C.Y.
Format: Article
Language:English
Subjects:
Business cycles
Comovement
Correlation analysis
Impact analysis
International business cycles
International business cycles Comovement Production fragmentation
International economics
International trade
Production fragmentation
Production structure
Production systems
Studies
Trade flows
World economy
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Summary:International trade increasingly involves trade in goods being produced in fragmentation arrangements across countries, with each country specializing in different stages of a production sequence. This paper examines empirically whether pairs of countries with more bilateral production fragmentation arrangements tend to have more correlated business cycles. Using cross-country data from 30 countries, we find that bilateral production fragmentation has a positive effect while the standard bilateral trade intensity indicator has a negative impact on business-cycle comovement. We also find that the positive effect of trade in complements (captured by bilateral production fragmentation) dominates the negative effect of trade in substitutes (explained by bilateral trade intensity), resulting in an overall positive impact of trade. Hence, bilateral production fragmentation plays a key role underlying the positive response of business-cycle comovement to increases in trade.
ISSN:0022-1996
1873-0353
DOI:10.1016/j.jinteco.2010.06.002