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Asian Business Cycle Synchronization

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  • DONG HE
  • WEI LIAO

Abstract

This paper develops a multi-level structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural VAR with a multi-level factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering nine emerging Asian economies and G-7 countries, we estimate a global supply factor, a global demand factor, and group supply and demand factors for each group of the economies. We find that, while the role of the global factors has intensified over the past fifteen years for most of the economies, output fluctuations in Asia have remained less synchronised with the global factor than those in the industrial countries. The Asian regional factors have become increasingly important in tightening the interdependence within the region over time. Thus while emerging Asian economies cannot "decouple" completely from the advanced economies, they have nonetheless sustained a strong independent cycle among themselves. We also find that synchronised supply shocks contributed more to the observed synchronisation in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement through vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronisation in emerging Asia.
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Suggested Citation

  • Dong He & Wei Liao, 2012. "Asian Business Cycle Synchronization," Pacific Economic Review, Wiley Blackwell, vol. 17(1), pages 106-135, February.
  • Handle: RePEc:bla:pacecr:v:17:y:2012:i:1:p:106-135
    DOI: j.1468-0106.2011.00574.x
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    File URL: http://hdl.handle.net/10.1111/j.1468-0106.2011.00574.x
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