BUSINESS CYCLE, CURRENCY AND TRADE, REVISITED

This paper provides long-run historical evidence for the link between business cycle synchronization, trade and the exchange rate regime. Using data from a large number of industrialized countries and a group of Asian economies, we examine this link in three sub-periods: the first globalization period (18701913), the bloc economy period (19151959) and the second globalization period (19602004). The business cycle is identified as the series of deviates from a HodrickPrescott filtered trend. Cyclical turning points are located in the business cycles of our sample of 21 major countries, which enables us to comment on the characteristics of business cycles in the three periods. Cross-correlations of the cyclical deviates are calculated for all the pairs of the 21 countries examined. It is apparent from casual inspection that the business cycle characteristics and the pattern of cross-correlations in the bloc economy period are different from those found for the two globalization periods, whereas there is less difference between the two globalization periods. Following the estimations by Frankel and Rose, we relate business cycle synchronization to trade patterns and currency unions. Consequently, we find that European integration was already discernible in terms of business cycle synchronization in the early 1900s and that a similar synchronization was not discernible for Asia.