Borders and business cycles

We document that business cycles of U.S. Census regions are substantially m ore synchronized than those of European countries. Data from regions within European countries confirm a European border effect - within-country corre lations are substantially larger than cross-country correlations. These res ults continue to hold after controlling for exogenous factors such as dista nce and size. We consider the role of four factors that have received atten tion in the debate about EMU: sectoral specialization, the level of trade, monetary policy and fiscal policy. We find that the lower level of trade be tween European countries explains most of the observed border effect. (C) 2 001 Elsevier Science BY All rights reserved.