Production Sharing and Business Cycle Synchronization in the Accession Countries

This chapter provides a quantitative assessment of the role of trade in the transmission of business cycles within and between the regions of Eastern and Western Europe. The model allows for trade in intermediate inputs that are substitutes in production and for nearshoring, in which intermediate inputs from the East and West are complements. The model is calibrated to data on aggregate and bilateral trade flow, relative country sizes, and the extent of nearshoring. The model suggests that expanded East-West trade will produce positive output comovements within Europe. However, the two types of trade also produce very different dynamics for consumption and labor supply. Thus, one's view of whether trade makes business cycles "more similar" across Europe or not depends both on the nature of trade and on the metric one uses to assess business cycle synchronization.