Academic journal article Political Economy Journal of India

Trade Flows, Financial Integration and Business Cycle Synchronization between India and North America the (USA and Canada): An Analysis

Academic journal article Political Economy Journal of India

Trade Flows, Financial Integration and Business Cycle Synchronization between India and North America the (USA and Canada): An Analysis

Article excerpt


In today's time, no country can survive in isolation. Globalization has become the norm for economic growth and development. It has interwoven economies with each other in more than one way. It has fostered both trade linkages and financial integration between the nations. Many countries including India abolished restrictive protectionist policies in 1991 and opened their borders to foreign trade flows and finance, cognizant of the fact that though the economy would reap the benefits but at the same time be susceptible to external shocks.

Trade interdependence impacts output as imports and exports take place, thus influencing business cycles of nations trading with each other. Similarly, movement of finance from one country to another affects capital, which in turn has a bearing on output eventually coordinating business cycles. This is apparent from the 2007-2009 global financial crises which caused a downward spiral of world economy along with worldwide trade shrinkage. Therefore, globalisation has led the economies of various nations to move in tandem with each other nevertheless, it may change in response to a shift in factors on which these linkages are based.

Consequently, there is significant interest particularly among policy makers to study the spill- over effects of this strong trade and financial integration. This is because they tend to be volatile because of both internal and external factors. Additionally, if business cycles are synchronized then there can be co-ordination in international policy formulation and relevant policy reforms can be undertaken by each country.

Against this backdrop, it is attempted to explore whether close trade and financial ties between India and North America (USA and Canada) foster business cycle synchronization among each other and also the impact of these intensities on the same.

Review of Literature

Over the last few years, economic integration between nations has deepened. Considerable amount of research has been undertaken to study if and how business cycles between nations indulging in international trade and financial flows move in tandem with each other. Fiess (2007) examined data for the time period 1965 to 2002 for Central America and United States to assess the degree of business cycle synchronization between. It was found that trade intensity did not have a significant effect on co-movements of business cycles. Also, remittances which were used as an indicator of financial linkage had a strong effect on these harmonized movements. Herrero et al (2008) evaluated the impact of trade and financial association on harmonious movement of business cycles between Spain and European Union, G-7 except Germany before 1970 and Latin America (Argentina, Mexico, Chile, Columbia, Peru, Venezuela) from 1960 to 2000. They take into account other factors which may have an impact on these movements. Their analysis showed that both - homogeneity in production structure and trade connections foster synchronized movements in business cycles between Spain and other economies, but this was not the case in the instance of financial linkages. Lee (2010) examined panel data for the duration 1990 to 2005 for fifty US states and twenty eight countries classified by World Bank as developed except US to study globalization and business cycle synchronization. His empirical investigation revealed that greater integration with the world in terms of both trade and finance led to co-movements in business cycles both within the regional economies as well as the rest of the world. They also found that the business cycles of the states were more closely related than those of the other economies under consideration. Kandil (2011) analysed data for time period 1970 to 1986 and 1987 to 2007 for five regional groups: Andean, Caribbean, Central America, LAC7 (Argentina, Brazil, Chile, Columbia, Mexico, Peru, Venezuela) and Mercosur by using correlation coefficients in real growth. …

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