International Transmission of Business Cycles Between Ireland and its Trading Partners

Given its high degree of integration into the world economy, Ireland has been affected by the current turmoil in financial markets and global recession. We estimate a model of simultaneous equations using a panel of cross-country annual data where trade intensity, sectoral specialisation, and financial integration are considered endogenous. Our results suggest that deeper trade and financial integration had strong direct positive effects on the synchronisation of Irish business cycles with its trading partners. Sectoral specialisation and national competitiveness differentials were sources of cyclical divergence. Sectoral specialisation had however an indirect positive effect on business cycle synchronisation via its positive effect on trade and financial integration. Business cycles between Ireland and its euro area trading partners have become more synchronised.