Borders and Business Cycles - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Borders and Business Cycles

October 1999Number 91

JEL classification: F41

Authors: Todd E. Clark and Eric van Wincoop

We document that business cycles of U.S. Census regions are substantially more synchronized than those of European Union countries, both over the past four decades and the past two decades. Data from regions within the four largest European countries confirm the presence of a European border effect—within-country correlations are substantially larger than cross-country correlations. These results continue to hold after controlling for exogenous factors such as distance and size. We consider the role of four factors that have received a lot of attention in the debate about EMU: sectoral specialization, the level of trade, monetary policy and fiscal policy. We find that the lower level of trade between European countries, and to a lesser extent the higher degree of sectoral specialization, can explain most of the observed border effect.

Available only in PDF PDF

38 pages / 349 kb

For a published version of this report, see Todd E. Clark and Eric van Wincoop, "Borders and Business Cycles," Journal of International Economics 55, no. 1 (October 2001): 59-85.

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