North-South business cycles

Abstract

This paper shows that the economic activity of the industrial North and developing South move together - when the North is above its trend, the South tends to be above its trend. We refer to this phenomenon as the \North-South business cycle. The paper develops a quantitative general equilibrium model of North-South trade that captures many cyclical features of North-South trade and production data. In particular, the high volatility of North-South terms of trade, and strong comovement of Northern and Southern activity. On the basis of this model we argue that North-South business cycles emerge because shocks originating in the North are transmitted to the South through international goods and assets trade.

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