International business cycle synchronization: A synthetic assessment

Abstract

We synthetically assess the three major transmission channels of international business cycles: bilateral trade, foreign direct investment (FDI), and portfolio investment flows between countries, while considering country-time heterogeneity with multiple fixed effects. Using the data of 65 countries during 2004–2019, we find that real and financial integration generates heterogeneous impacts on business cycle comovement. Trade integration, particularly through intermediate input trade, drives business cycle synchronization, and its impact has been more pronounced after the global financial crisis. This may be due to deepening intra-industry trade and dense global value chains. We also find greenfield FDI leads to business cycle synchronization when considering its time-lags. Higher short-term debt market integration is also associated with more synchronized business cycle comovement, implying that balance sheet effects and the related credit cycle can exert influence on business cycle comovement.