Business cycle co-movement: Evidence from the Great Depression

Recent analysis focuses on the gold standard as a channel for the transmission of the Great Depression. Trade linkages, which loom large in the recent literature, play a smaller role. Both the gold standard and trade were associated with higher co-movement at the bilateral level during the entire interwar period. We document that fixed exchange rates and trade made a comeback after 1932, but co-movement declined. The fall after 1932 appears to be driven by the rise of smaller blocs based on monetary and trade cooperation and an accompanying fall in co-movement between blocs.