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Determinants of Business Cycle Synchronization in East Asia: An Extreme Bound Analysis

  • Toan Nguyen

    ()

    (Room 1, Engineering Building No. 4, Yoshida Honmachi, Sakyo-ku, Kyoto,Japan)

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    We investigate the determinants of business cycle synchronization in East Asia by testing the robustness of the potential candidates, using the technique of Extreme Bound Analysis in an OLS regression framework with Newey-West correction for heteroskedasticity and autocorrelation. We find that trade openness and intra-industry trade are major channels of business cycle synchronization. Although the similarity of monetary policies is statistically correlated with degree synchronization, we are unsure whether the former causes the latter or vise versa. The findings are probably good news to the proponents of the prospective currency union. If the trend of increasing openness and bilateral intra-industry trade continues in East Asia, it is expected that the costs of forming a currency union would diminish as business cycles become more synchronized.

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    File URL: http://depocenwp.org/upload/pubs/NguyenNgocToan/Determinants_of_Business_Cycle_Synchronization_in_East_Asia-rv2_DEPOCENWP.pdf
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    Paper provided by Development and Policies Research Center (DEPOCEN), Vietnam in its series Working Papers with number 14.

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    Length: 23 pages
    Date of creation: Oct 2007
    Date of revision:
    Handle: RePEc:dpc:wpaper:1407
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    1. Böwer, Uwe & Guillemineau, Catherine, 2006. "Determinants of business cycle synchronisation across euro area countries," Working Paper Series 0587, European Central Bank.
    2. Kwanho Shin & Yunjong Wang, 2003. "Trade Integration and Business Cycle Synchronization in East Asia," ISER Discussion Paper 0574, Institute of Social and Economic Research, Osaka University.
    3. Frankel, Jeffrey A & Rose, Andrew K, 1998. "The Endogeneity of the Optimum Currency Area Criteria," Economic Journal, Royal Economic Society, vol. 108(449), pages 1009-25, July.
    4. Chow, Hwee Kwan & Kim, Yoonbai, 2003. "A common currency peg in East Asia? Perspectives from Western Europe," Journal of Macroeconomics, Elsevier, vol. 25(3), pages 331-350, September.
    5. Jean Imbs, 2004. "Trade, Finance, Specialization, and Synchronization," The Review of Economics and Statistics, MIT Press, vol. 86(3), pages 723-734, August.
    6. Xavier Sala-i-Martin, 1997. "I just ran four million regressions," Economics Working Papers 201, Department of Economics and Business, Universitat Pompeu Fabra.
    7. Marianne Baxter & Michael Kouparitsas, 2004. "Determinants of business cycle comovement: a robust analysis," Working Paper Series WP-04-14, Federal Reserve Bank of Chicago.
    8. M. Ayhan Kose & Eswar S. Prasad & Marco E. Terrones, 2003. "How Does Globalization Affect the Synchronization of Business Cycles?," American Economic Review, American Economic Association, vol. 93(2), pages 57-62, May.
    9. Levine, Ross & Renelt, David, 1991. "A sensitivity analysis of cross-country growth regressions," Policy Research Working Paper Series 609, The World Bank.
    10. Edward E. Leamer, 1982. "Let's Take the Con Out of Econometrics," UCLA Economics Working Papers 239, UCLA Department of Economics.
    11. Menzie D. Chinn & Hiro Ito, 2002. "Capital Account Liberalization, Institutions and Financial Development: Cross Country Evidence," NBER Working Papers 8967, National Bureau of Economic Research, Inc.
    12. M. Ayhan Kose & Eswar Prasad & Marco Terrones, 2003. "How Does Globalization Affect the Synchronization of Business Cycles?," IMF Working Papers 03/27, International Monetary Fund.
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