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Borders and Business CyclesTodd E. Clark |
Abstract 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. Todd E. Clark is an assistant vice president and economist at the Federal reserve Ban
of Kansas City. Eric van Wincoop is a senior economist at the Federal Reserve Bank of New
York. The authors would like to thank participants at the conference "Lessons from
Intranational Economics for International Economics" at Studienzentrum Gerzensee,
Switzerland, and the Latin American Meeting of the Econometric Society in Cancun, Mexico.
They would also like to thank Marco del Negro, John Helliwell, Antonio Fatas, and Lucrezia
Reichlin for discussions and comments. They thank Bent Sorensen and Antonio Fatas for
making available data collected in their own research. The authors are also very much
indebted to Scott Nicholson for excellent research support and collecting the data. The
views expressed in the paper are those of the authors and do not necessarily reflect the
position of the Federal Reserve Bank of New York, the Federal Reserve Bank of Kansas City,
or the Federal Reserve System.
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