Trade Integration and Business Cycle Synchronization in Latin American Countries

This paper investigates the relationship between business cycle synchronization and trade integration in the Latin American region. Using data for 17 Latin American countries and the United States (US) from 1980 to 2018, we document the time-series characteristics of business cycle synchronization and intra- and inter-regional trade in the region and empirically test whether trade integration contributed to business cycle synchronization. The data demonstrate that the business cycle synchronization index has been steadily increasing in the region. Regional trade integration increased until the financial crisis in 2008 and decreased slightly thereafter. The results of a system generalized method of moments (GMM) regression indicate that bilateral trade with the US significantly increased business cycle synchronization in the region, except during the 2000s, while regional trade had no significant effect. These results emphasize the importance of the indirect trade channel, especially with the US, as a main channel of business cycle synchronization in Latin America.