GEP Seminar: Andrei Levchenko (University of Michigan)

Globalization, structural change and international co-movement (with Barthélémy Bonadio, Zhen Huo and Nitya Pandalai-Nayar)

Abstract: We study the roles of globalization and structural change in the evolution of international GDP comovement among OECD countries over the period 1978-2007. In recent decades, trade integration between advanced economies has increased rapidly while business cycle comovement has remained stable. We show that structural change - trend reallocation of economic activity towards services - plays an important part in solving this apparent puzzle. Business cycle shocks in the service sector are less internationally correlated than in manufacturing, and thus structural change lowers GDP correlations by increasing the share of less correlated sectors in GDP.  Globalization - trend reductions in trade costs - exerts two opposing effects on cross-border GDP comovement. On the one hand, greater trade linkages increase international transmission of shocks and therefore comovement. On the other, because services and goods are complements in both consumption and production, globalization induces structural change towards services because it reduces the relative price of goods to services. Thus the overall impact of globalization on international comovement is ambiguous. We use a multi-country, multi-sector model of international production and trade to quantify these effects. Quantitatively, the two opposing effects of globalization on comovement partly cancel each other out, limiting the net contribution of globalization to increasing international comovement over this period.

Link to paper (.pdf)