Relationship between Economic Integration and Business Cycle Synchronization

Abstract One of the basic tenets in recent international trade literature is about the effect of trade integration on business cycle synchronization (BCS) among trading countries. The objective of this paper is to explore the main determinants of business cycle synchronization, with emphasis on trade integration. To this end, we have specified two simultaneous regression equations which were estimated by weighted least squares method. The sample used data for the Organization of Islamic Countries for two consecutive periods; 1980-89 and 1990-2005. The empirical result showed that trade integration is significantly the major factor of business cycle synchronization in Islamic countries, particularly during 1990-2005 period. In addition, it was shown that similarities in both fiscal and monetary policies as well as economics structures have had considerable influence on their BCS.