The Micro Origins of International Business-Cycle Comovement

This paper investigates the role of individual firms in international business-cycle comovement using data covering the universe of French firm-level value added and international linkages over the period 1993-2007. At the micro level, trade and multinational linkages with a particular foreign country are associated with a significantly higher correlation between a firm and that foreign country. The impact of direct linkages on comovement at the micro level has significant macro implications. Without those linkages the correlation between France and foreign countries would fall by about 0.098, or one-third of the observed average correlation of 0.291 in our sample of partner countries. (JEL F14, F23, F44, F62, L14) Countries that exhibit greater bilateral trade and multinational production linkages have more correlated business cycles (Frankel and Rose 1998; Kleinert, Martin, and Toubal 2015). While the empirical literature has repeatedly confirmed the trade-comovement relationship in the data, its meaning is not well understood, either empirically or quantitatively. Taken at face value, the positive association between bilateral trade and multinational linkages and comovement is often interpreted as evidence of transmission of shocks across countries through those linkages. The empirical literature has faced two related challenges. The first is the critique by Imbs (2004) that countries that trade more with each other are similar in other ways, and thus subject to common shocks. Under an extreme version of this view, the trade linkage variable in the Frankel-Rose specification does not reflect the