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Examining industrial interdependence between Japan and South Korea: A FAVAR approach

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  • Selover, David D.
  • Yagihashi, Takeshi

Abstract

This paper investigates the economic relationship between Japan and South Korea by incorporating disaggregated output measures. Using a factor-augmented vector autoregression (FAVAR) model, we conduct several experiments to test the nature of the interdependence, both in the aggregate and by sector. We find that South Korean output shocks affect the Japanese economy in a significant manner, whereas Japanese output shocks have a limited effect on South Korea. By further examining the transmission mechanism of sectoral output shocks and comparing them with the direction of sectoral trade, we find evidence of cross-border production sharing, which explains the asymmetric results seen in the aggregate output.

Suggested Citation

  • Selover, David D. & Yagihashi, Takeshi, 2015. "Examining industrial interdependence between Japan and South Korea: A FAVAR approach," Japan and the World Economy, Elsevier, vol. 36(C), pages 67-87.
  • Handle: RePEc:eee:japwor:v:36:y:2015:i:c:p:67-87
    DOI: 10.1016/j.japwor.2015.08.001
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    Keywords

    Business cycle synchronization; Transmission; International interdependence; Comovements; Factor-augmented vector autoregressions;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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