Economic integration, industrial specialization, and the asymmetry of macroeconomic fluctuations

We show empirically that regions with a more specialized production structu re exhibit output fluctuations that are less correlated with those of other regions (less 'symmetric' fluctuations). Combined with the causal relation running from capital market integration to regional specialization found i n an earlier study, this finding supports the idea that higher capital mark et integration leads to less symmetric fluctuations. This mechanism counter balances the effect of lower trade-barriers on the symmetry of fluctuations quantified by Frankel and Rose (1998). Deriving a simple closed form expre ssion for the gains from risk sharing for CRRA utility is an independent co ntribution of the present article. (C) 2001 Elsevier Science B.V. All right s reserved.