Globalization, structural change and international comovement

We study the roles of globalization and structural change in the evolution of international GDP comovement over the period 1978-2007. In this period, trade integration between advanced economies increased rapidly while average GDP correlations remained stable. Structural change-reallocation of economic activity towards services-is important in resolving this apparent puzzle. Business cycle shocks in the service sector are less internationally correlated than in manufacturing, and thus structural change lowers GDP comovement by increasing the GDP share of less correlated sectors. Globalization-reductions in trade costs-exerts two opposing effects on international comovement. While greater trade linkages increase international transmission of shocks, globalization also induces structural change towards services. We quantify these effects in a multi-country, multi-sector model of international production and trade. The two opposing effects of globalization on comovement largely cancel each other out, limiting the net contribution of globalization to increasing international comovement.