Description

World Trade has experienced an increased integration over the last 15 years. More than half of world trade currently takes place under actual or future trading blocks. Our main goal is to test whether free trade or regional integration agreements (FTA or RIA, respectively) have strengthened the trade channel of international transmission of business cycles. With annual information for 147 countries over the 1960-99 period, we conduct our analysis for a panel data of country pairs (33676 country pairs), and we find the following results: ( i) Higher trade intensity between two countries generates a stronger cycle synchronization. (ii) This impact is even stronger among country pairs with a free trade agreement. (iii) The impact of trade intensity on cycle synchronization is stronger among industrial than among developing country pairs. (iv) The impact within each group of country pairs is higher for the ones engaged in FTAs. (v) Economic effects of higher trade intensity in the presence of FTAs are stronger during the 1990s.