Global Value Chain and Business Cycle Comovement: Does Distance Matter?

2020-08-26 Working Paper Series
HKUST CEP Working Paper No.2020-05

Photo by Kurt Cotoaga on Unsplash

A salient feature of recent globalization is the emergence of global value chain, along which countries specialize in different positions. These difference of positions along the global production network may affect the business cycle comovement of two countries. Based on influence matrix derived from input-output linkage, a novel measure of distance is proposed to capture the heterogeneity between two countries in output response to country-specific technology shocks that propagate through global production network. We then show theoretically this distance is negatively correlated with output correlation across countries. To empirically test this conclusion, we relate the model to the data and calculate the distance and position measure using the world input-output table. The empirical result confirms a robust and significantly negative relationship between distance along the global value chain and business cycle synchronization. The closer the two countries' distance, the more comoved their output is. This result is robust to alternative distance measures and alternative output correlations. These findings thus offer new insights regarding international transmission of shocks through trade linkage.

Juanyi Xu
Associate Professor, Department of Economics
Professor Juanyi Jenny Xu joined HKUST Department of Economics in 2006. She worked in Simon Fraser…
Daoju Peng
Capital University of Economics and Business, Beijing
Kang Shi
Chinese University of Hong Kong

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