02255cas a2200253 a 4500 AALejournalIMF003828 230101c9999 xx r poo 0 0eng d 5.00 USD 9781451862232 1018-5941 BD-DhAAL BD-DhAAL Yi, Kei-Mu. Can the Standard International Business Cycle Model Explain the Relation Between Trade and Comovement? / Kei-Mu Yi, Ayhan Kose. Washington, D.C. : International Monetary Fund, 2005. 1 online resource (40 pages) IMF Working Papers <strong>Off-Campus Access:</strong> No User ID or Password Required <strong>On-Campus Access:</strong> No User ID or Password Required Electronic access restricted to authorized BRAC University faculty, staff and students Recent empirical research finds that pairs of countries with stronger trade linkages tend to have more highly correlated business cycles. We assess whether the standard international business cycle framework can replicate this intuitive result. We employ a three-country model with transportation costs. We simulate the effects of increased goods market integration under two asset market structures, complete markets and international financial autarky. Our main finding is that under both asset market structures the model can generate stronger correlations for pairs of countries that trade more, but the increased correlation falls far short of the empirical findings. Even when we control for the fact that most country-pairs are small with respect to the rest of the world, the model continues to fall short. We also conduct additional simulations that allow for increased trade with the third country or increased TFP shock comovement to affect the country pair's business cycle comovement. These simulations are helpful in highlighting channels that could narrow the gap between the empirical findings and the predictions of the model. Mode of access: Internet Kose, Ayhan. IMF Working Papers; Working Paper ; No. 2005/204 Full text available on IMF http://elibrary.imf.org/view/journals/001/2005/204/001.2005.issue-204-en.xml IMF e-Library