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Asian Business Cycle Synchronisation

  • Dong He

    (Hong Kong Institute for Monetary Research)

  • Wei Liao

    (Hong Kong Institute for Monetary Research)

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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Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 062011.

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Length: 37 pages
Date of creation: Feb 2011
Date of revision:
Handle: RePEc:hkm:wpaper:062011
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  1. Allegret, Jean-Pierre & Essaadi, Essahbi, 2011. "Business cycles synchronization in East Asian economy: Evidences from time-varying coherence study," Economic Modelling, Elsevier, vol. 28(1-2), pages 351-365, January.
  2. Jean Imbs, 2003. "Trade, Finance, Specialization, and Synchronization," IMF Working Papers 03/81, International Monetary Fund.
  3. Jeffrey A. Frankel & Andrew K. Rose, 1996. "The Endogeneity of the Optimum Currency Area Criteria," NBER Working Papers 5700, National Bureau of Economic Research, Inc.
  4. Hans Genberg & Dong He, 2007. "Monetary and Financial Cooperation among Central Banks in East Asia and the Pacific," Working Papers 0715, Hong Kong Monetary Authority.
  5. Andrei A. Levchenko & Julian di Giovanni, 2009. "Putting the Parts Together: Trade, Vertical Linkages, and Business Cycle Comovement," IMF Working Papers 09/181, International Monetary Fund.
  6. M. Ayhan Kose & Christopher Otrok & Charles H. Whiteman, 2003. "International Business Cycles: World, Region, and Country-Specific Factors," American Economic Review, American Economic Association, vol. 93(4), pages 1216-1239, September.
  7. Amengual, Dante & Watson, Mark W., 2007. "Consistent Estimation of the Number of Dynamic Factors in a Large N and T Panel," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 91-96, January.
  8. Kim, Soyoung & Lee, Jong-Wha & Park, Cyn-Young, 2009. "Emerging Asia: Decoupling or Recoupling," Working Papers on Regional Economic Integration 31, Asian Development Bank.
  9. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," NBER Working Papers 10220, National Bureau of Economic Research, Inc.
  10. Dong He & Lillian Cheung & Jian Chang, 2007. "Sense and Nonsense on Asia's Export Dependency and The Decoupling Thesis," Working Papers 0703, Hong Kong Monetary Authority.
  11. By Norman Loayza & Humberto Lopez & Angel Ubide, 2001. "Comovements and Sectoral Interdependence: Evidence for Latin America, East Asia, and Europe," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 7.
  12. Hiroshi Fujiki & nd Akiko Terada-Hagiwara, 2007. "Financial Integration in East Asia," IMES Discussion Paper Series 07-E-12, Institute for Monetary and Economic Studies, Bank of Japan.
  13. Canova, Fabio & Ciccarelli, Matteo & Ortega, Eva, 2007. "Similarities and convergence in G-7 cycles," Journal of Monetary Economics, Elsevier, vol. 54(3), pages 850-878, April.
  14. Ng, Eric C.Y., 2010. "Production fragmentation and business-cycle comovement," Journal of International Economics, Elsevier, vol. 82(1), pages 1-14, September.
  15. Imbs, Jean, 2006. "The real effects of financial integration," Journal of International Economics, Elsevier, vol. 68(2), pages 296-324, March.
  16. Genberg, Hans & Siklos, Pierre L., 2010. "Revisiting the shocking aspects of Asian monetary unification," Journal of Asian Economics, Elsevier, vol. 21(5), pages 445-455, October.
  17. Robert Koopman & Zhi Wang & Shang-Jin Wei, 2008. "How Much of Chinese Exports is Really Made In China? Assessing Domestic Value-Added When Processing Trade is Pervasive," NBER Working Papers 14109, National Bureau of Economic Research, Inc.
  18. Eric Girardin, 2005. "Growth-cycle features of East Asian countries: are they similar?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 10(2), pages 143-156.
  19. Dong He & Wenlang Zhang, 2008. "How Dependent is the Chinese Economy on Exports and in What Sense has its Growth been Export-led?," Working Papers 0814, Hong Kong Monetary Authority.
  20. Dan Andrews & Marion Kohler, 2005. "International Business Cycle Co-movements through Time," RBA Annual Conference Volume, in: Christopher Kent & David Norman (ed.), The Changing Nature of the Business Cycle Reserve Bank of Australia.
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