Regional business cycles and national economic borders: What are the effects of trade in developing countries?

Using regional gross product data for Argentina and Brazil over the period 1961-2000, we find that business cycle synchronization within countries is substantially larger than across them. Factors such as monetary policy and large country-specific shocks play a significant role in explaining this observed border effect. Furthermore, our GMM single and multiple equation estimates based on Brazilian states and Argentinean national data provide indicative evidence that the higher level of trade among regions within a country is an important factor that accounts for differences in output correlations across countries.