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Working Paper
How much does international trade affect business cycle synchronization ?
In a recent article, Jeffrey Frankel and Andrew Rose (1998) examine the hypothesis that greater trade flows between two countries cause greater synchronicity between their business cycles. The increase in business cycle synchronicity may be seen as rationalizing a common monetary policy and, so, a shared currency. Arguing that product specialization would lower the synchronicity of business cycles, Frankel and Rose posit that a regression of output correlation on overall trade will indicate whether (positive) common demand shocks and productivity spillovers dominate or (negative) ...