1. Trade and the Transmission of Shocks in Europe GDR, Paris, November 18th and 19th 2004 Fabien RONDEAU CREM - University of Rennes 1

2. Trade and transmission of shocks in Europe framework How trade could be or not a factor of business cycle transmission ? - greater openness of the major economies, more and more integrated. - instauration of the EMU with a regime of fixed exchange rate. Business cycle of a country should be more and more dependant of those of the countries partners of this country. Crucial role of the imported demand Economic context Theoretical effects The question is

3. Previous research Trade vs financial linkages and crisis Glick and Rose (1998) Van Rijckeghem et Weder (1999) Forbes and Rigobon (2001) Fratzscher (2002)... Trade and business cycles Frankel and Rose (1997) Paci and Rovelli (1998) Shin and Wang (2003) Hoffmann (2003) Imbs (2003)... Trade and transmission of shocks in Europe

4. Econometric method 1) estimation of a near-VAR to quantify the sensitivity of a country to the external demand 2) impulse response functions Classical IRF IRF with some constraints on the exportations of a country p 2 stages Trade and transmission of shocks in Europe

5. Data Real GDP and nominal exportations from OECD database quarterly, from 1976 to 2001 17 Europeans countries for 16 endogenous variables. Trade and transmission of shocks in Europe

6. Modelisation (1) (4) (2) =  ij (3) Trade and transmission of shocks in Europe

7. Modelisation (2) (5)avec y i * is the sum of the GDP growth rate of the countries j weighted by the exportations share between i and j. Under matrix form We permit that the contagion's effects takes time so lags are integrated L : lag operator W: trade share's matrix (6) (7) Structural VAR VMA (8) (9) Trade and transmission of shocks in Europe

8. Estimation method (3) Y* is divided in two components: the rest of the Europe (y c ) the rest of the world (y*) The optimal number of lags has been determined sequentially by the AIC and BIC The system has been estimated by the method SUR Trade and transmission of shocks in Europe

9. Results Trade and transmission of shocks in Europe

10. IRF Decomposition -big countries: Germany, France, Italy, Great-Britain. -average countries: Spain, the Netherlands, Luxembourg, Switzerland. -small countries: Sweden, Austria, Greece, Denmark, Portugal, Finland, Norway, Ireland. Geographical The level of GDP Example: between Finland, Norway, Sweden and Denmark Trade and transmission of shocks in Europe

11. IRF (2) 1) classical IRF 2) constrained IRF Trade and transmission of shocks in Europe

12. Results The effects of diffusion are equals to Trade and transmission of shocks in Europe ID=

13. Figures 1 Correlation between variables Correlation between ranks Trade and transmission of shocks in Europe

14. Effects of a closer integration in Europe the intra-Europeans exportations share are multiplied by 1.01 Trade and transmission of shocks in Europe

15. Figures 2 Correlation between initial effect and variation of the effect Correlation between ranks Trade and transmission of shocks in Europe

16. Conclusion The macro-economics independences are correlated with trade most of the contagion is explained by the variation of exportations and importations the big countries are the main source of contagion A closer integration seems to increase the transmission of the business cycle after a common shock. So, to increase the symmetric effects and the power of the big countries. Development: - that the ROW is endogenous - integrate the financials flows. Trade and transmission of shocks in Europe

17. Data