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This paper was prepared for an invited session of the 2003 annual meetings of the American Economic Association and will be published in the May 2003 Papers and Proceedings volume of the American Economic Review. We are grateful to Cesar Calderon, Frank Diebold, Hideaki Hirata, and Henry Kim for useful suggestions.
See Kose and Yi (2002) for a discussion about the theoretical impact of increasing trade integration on business cycle comovement. See Heathcote and Perri (2002) for the implications of increasing financial linkages on cross-country business cycle correlations.
For a detailed description of the data and sources see Kose, Prasad, and Terrones (2003a).
Our estimations of dynamic factor models closely follow Otrok and Whiteman (1997). Lumsdaine and Prasad (2003) employ a different method and estimate a common factor using the data of OECD countries to study the dynamics of international business cycles.
We estimated factor models using shorter sample periods; however, the results are not very informative since shorter sample periods result in less precisely estimated parameters.
We provide more detailed regression results and robustness tests in Kose, Prasad, and Terrones (2003b).
Calderon, Chong and Stein (2002) find that trade linkages play a more important role in explaining business cycle comovement in advanced countries than in developing countries.