Linkage of Business Cycles in East Asian Countries after the Currency Crisis

In this paper, we study linkage of business cycles in five East Asian countries (South Korea, Malaysia, the Philippines, Singapore and Thailand). In recent years a number of discussions have been held globally about international monetary arrangements. Evaluation in terms of welfare is needed before this kind of economic integration can be implemented. According to the theory of optimal currency areas, the existence of similarity in external shocks is required for such policy coordination. As the first step, we calculate supply shocks and demand shocks in East Asian countries using structural VAR, and observed the similarity of supply shocks and demand shocks. Secondly, the turning points of business cycles were estimated using the Markov switching model. We show the similarity of business cycles in this area. The conclusions obtained were as follows. First, significant correlations were observed between supply shocks of East Asian countries as a result of calculation using structural VAR. The importance of demand shock correlation is less than supply shock correlation. Also, with the results of the Markov switching model estimation, we observed a possibility that the turning points of business cycles in East Asian countries have significant linkages. Some of the turning points could have been transmitted by shocks from other regions, but we found that there exists unique linkage between East Asian countries. It is not easy to directly observe external shocks, which are usually observed through estimation. Although the reliability of estimation using one method is not enough to obtain concrete results, the results of the several methods attempted in this paper suggest the possibility that external shocks in East Asian countries have a significant degree of similarity. According to the theory of optimal currency areas, these results could be considered as supporting results for the introduction of a single currency system in this region.