The IT Revolution and Macroeconomic Volatility in Newly Developed Countries — On the Real and Financial Linkages

The emergence of Asia is often credited to the emergence of information technology (IT) revolution. In this chapter, we concentrate on the impact of the IT revolution on the three newly developed countries (NDCs) — South Korea (hereafter Korea), Singapore, and Taiwan — denoted collectively as Asian NDC-3, three Asian Newly Developed Countries. The impact of the IT revolution on these three countries has two routes: one is the impact on GDP growth (the real linkage) through trade and foreign direct investment (FDI), and the other is the impact on stock prices (the financial linkage) through stock markets. The main purpose of this chapter is to use recently developed econometric techniques to find the causal relationship between the volatilities of the financial markets, as represented by the volatility of stock price index, and economic growth, as manifested in the volatility of GDP. Based on the modified Mundell–Fleming–Dornbusch macroeconomic model, we also include five variables — consumer price index, exchange rate, interest rate, narrow money supply (M1), and merchandise exports. This chapter measures volatility by the square roots of conditional variances that are generated by the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) procedure. In terms of methodology, our contributions lie on the time-series and panel data Granger causality analyses of financial markets and economic growth, and on the use of the ARCH or GARCH model to estimate volatilities. In terms of the countries, our analysis is concentrated on the impact of the IT revolution on the NDCs with similar stage of economic development: Korea, Singapore, and Taiwan.