Multinational Firms, Trade, And The Trade-Comovement Puzzle
Speaker(s) Mr. Gautham Udupa, PhD Candidate, University of Houston Publication Reserve Bank of India, CAFRAL, Mezzanine floor, Main Building, Shahid Bhagat Singh road, Fort, Mumbai 400001

Existing empirical studies show a strong positive correlation between bilateral trade and business cycle comovement within country-pairs. I show that for OECD economies, this relationship weakens considerably when bilateral FDI stock is controlled for, while FDI is significant. I develop a two-country business cycle model with heterogeneous firms, inter-national trade, and multinational activity to explain this empirical finding. The calibrated model generates the positive relationship between trade and comovement, and between FDI and comovement. In addition, the simulation results are consistent with the empirical regressions with both trade and FDI.

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