Aggregate shocks decomposition for eight East Asian countries

All economies experience peaks and troughs in their business cycles. This paper examines eight East Asian economies, employing a Bayesian dynamic factor model that allows the decomposition of aggregate shocks into country-specific, regional and world common business cycles. It therefore allows the identification of causes for major events experienced by these countries. Empirical evidences show that country-specific factors are the most important in determining the major events for all the countries examined here, implying the need for each country to rely more heavily on its own independent counter-cyclical policies. Although the regional factor plays a less important role than the country-specific factor, it accounts for a sizeable share in the output fluctuation of the region. The regional factor is most prevalent for Singapore, Korea, Malaysia and Thailand, indicating that a regional coordinated policy is rather more effective for these economies to respond to disturbances. The world factor explains only around 7% of the output variation in East Asia, which might explain why the East Asian economies are relatively insulated from the recent global financial crisis.