Working Paper: CEPR ID: DP3019
Authors: Aart Kraay; Jaume Ventura
Abstract: It is well known that business cycles in OECD countries exhibit a remarkable degree of synchronization. Much less known is that the peak of the OECD cycle is associated with high prices of labour-intensive products and low prices of capital-intensive ones. We document this cyclical behaviour of product prices and argue that it offers an important clue as to why business cycles are so synchronized. Positive shocks in one or more countries raise the prices of labour-intensive products and, as a result, the demand for labour throughout the industrialized world. This generates increases in wages, employment and output in all industrial countries. Through this channel, shocks are positively transmitted across countries, creating a force towards the synchronization of business cycles.
Keywords: commodity trade; international transmission of shocks; OECD cycle
JEL Codes: E30; F10; F40
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Positive shocks to the economy (F41) | Increase in prices of labor-intensive products (F66) |
| Increase in prices of labor-intensive products (F66) | Increase in demand for labor (J23) |
| Increase in demand for labor (J23) | Increase in wages (J31) |
| Increase in demand for labor (J23) | Increase in employment (J23) |
| Increase in demand for labor (J23) | Increase in output (E23) |
| Positive shocks to the economy (F41) | Increase in demand for labor (J23) |
| Increase in prices of labor-intensive products (F66) | Increase in wages, employment, and output (J39) |