A Factor-Augmented Vector Autoregression Analysis of Business Cycle Synchronization in East Asia and Implications for a Regional Currency Union
Debate continues over whether a monetary or currency union will be a viable alternative to the current exchange arrangements in East Asia. This paper adds to the literature by assessing the level of business cycle synchronization among 10 major East Asian economies which is considered a key precondition for a regional currency union. Unlike previous studies, this paper employs a factor-augmented vector autoregression model that characterizes a large set of 62 foreign and domestic variables simultaneously. Five common shocks are identified, and we examine how and to what extent these shocks affect each economy in the region. Empirical results indicate that the majority of East Asian economies exhibit similar responses to world and regional shocks. Of particular importance is the finding that individual gross domestic products (GDPs) are well synchronized in response to the two major determinants of world and regional GDP shocks. Overall, the evidence presents positively for consideration of a regional currency union in East Asia. Some suggestions are offered concerning steps to build a foundation towards the establishment of an East Asian currency union.
|Date of creation:||12 Dec 2013|
|Contact details of provider:|| Postal: P.O. Box 789, Manila|
Fax: (63-2) 636-2648
Web page: http://www.adb.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Moneta, Fabio & Rüffer, Rasmus, 2009. "Business cycle synchronisation in East Asia," Journal of Asian Economics, Elsevier, vol. 20(1), pages 1-12, January.
- Bernanke, Ben S. & Boivin, Jean, 2003.
"Monetary policy in a data-rich environment,"
Journal of Monetary Economics,
Elsevier, vol. 50(3), pages 525-546, April.
- Jushan Bai & Serena Ng, 2000.
"Determining the Number of Factors in Approximate Factor Models,"
Econometric Society World Congress 2000 Contributed Papers
1504, Econometric Society.
- Jushan Bai & Serena Ng, 2002. "Determining the Number of Factors in Approximate Factor Models," Econometrica, Econometric Society, vol. 70(1), pages 191-221, January.
- Jushan Bai & Serena Ng, 2000. "Determining the Number of Factors in Approximate Factor Models," Boston College Working Papers in Economics 440, Boston College Department of Economics.
- Olivier Jean Blanchard & Danny Quah, 1988.
"The Dynamic Effects of Aggregate Demand and Supply Disturbances,"
NBER Working Papers
2737, National Bureau of Economic Research, Inc.
- Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-673, September.
- Olivier Jean Blanchard & Danny Quah, 1988. "The Dynamic Effects of Aggregate Demand and Supply Disturbance," Working papers 497, Massachusetts Institute of Technology (MIT), Department of Economics.
- Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, Oxford University Press, vol. 120(1), pages 387-422.
- Lutz Kilian, 2009.
"Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market,"
American Economic Review,
American Economic Association, vol. 99(3), pages 1053-1069, June.
- Kilian, Lutz, 2006. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," CEPR Discussion Papers 5994, C.E.P.R. Discussion Papers.
- Mario Forni & Marc Hallin & Lucrezia Reichlin & Marco Lippi, 2000.
"The generalised dynamic factor model: identification and estimation,"
ULB Institutional Repository
2013/10143, ULB -- Universite Libre de Bruxelles.
- Mario Forni & Marc Hallin & Marco Lippi & Lucrezia Reichlin, 2000. "The Generalized Dynamic-Factor Model: Identification And Estimation," The Review of Economics and Statistics, MIT Press, vol. 82(4), pages 540-554, November.
- Forni, Mario & Hallin, Marc & Lippi, Marco & Reichlin, Lucrezia, 1999. "The Generalized Dynamic Factor Model: Identification and Estimation," CEPR Discussion Papers 2338, C.E.P.R. Discussion Papers.
- James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
- 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.
- Fabio C. Bagliano & Claudio Morana, 2006.
"International Macroeconomic Dynamics: A Factor Vector Autoregressive Approach,"
Carlo Alberto Notebooks
32, Collegio Carlo Alberto.
- Bagliano, Fabio C. & Morana, Claudio, 2009. "International macroeconomic dynamics: A factor vector autoregressive approach," Economic Modelling, Elsevier, vol. 26(2), pages 432-444, March.
- Fabio C. Bagliano & Claudio Morana, 2006. "International Macroeconomic Dynamics: a Factor Vector Autoregressive Approach," ICER Working Papers 41-2006, ICER - International Centre for Economic Research.
- Lee, Grace HY & M, Azali, 2010.
"Is East Asia an optimum currency area?,"
52556, University Library of Munich, Germany.
- Lee, Grace H.Y. & Koh, Sharon G.M., 2012. "The prospects of a monetary union in East Asia," Economic Modelling, Elsevier, vol. 29(2), pages 96-102.
- Rana, Pradumna B., 2007. "Economic integration and synchronization of business cycles in East Asia," Journal of Asian Economics, Elsevier, vol. 18(5), pages 711-725, October.
- Kim, David, 2007. "An East Asian currency union?: The empirical nature of macroeconomic shocks in East Asia," Journal of Asian Economics, Elsevier, vol. 18(6), pages 847-866, December.
- Eswar S. Prasad & Jeffery A. Gable, 1998.
"International Evidence on the Determinants of Trade Dynamics,"
IMF Staff Papers,
Palgrave Macmillan, vol. 45(3), pages 401-439, September.
- Eswar S Prasad & Jeffery A. Gable, 1997. "International Evidenceon the Determinants of Trade Dynamics," IMF Working Papers 97/172, International Monetary Fund.
- Sandra Eickmeier, 2009. "Comovements and heterogeneity in the euro area analyzed in a non-stationary dynamic factor model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 933-959.
- Burbidge, John & Harrison, Alan, 1984.
"Testing for the Effects of Oil-Price Rises Using Vector Autoregressions,"
International Economic Review,
Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 25(2), pages 459-484, June.
- John Burbidge & Alan Harrison, 1982. "Testing for the Effects of Oil-Price Rises Using Vector Autoregressions," School of Economics Working Papers 1982-01, University of Adelaide, School of Economics.
- Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000.
"On Regional Monetary Arrangements For ASEAN,"
CEPR Discussion Papers
2411, C.E.P.R. Discussion Papers.
- Bayoumi, Tamim & Eichengreen, Barry & Mauro, Paolo, 2000. "On Regional Monetary Arrangements for ASEAN," Journal of the Japanese and International Economies, Elsevier, vol. 14(2), pages 121-148, June.
- Dong He & Wei Liao, 2012.
"Asian Business Cycle Synchronization,"
Pacific Economic Review,
Wiley Blackwell, vol. 17(1), pages 106-135, 02.
- Thomas D. Willett & Orawan Permpoon & Lalana Srisorn, 2010. "Asian Monetary Cooperation: Perspectives From The Optimum Currency Area Analysis," The Singapore Economic Review (SER), World Scientific Publishing Co. Pte. Ltd., vol. 55(01), pages 103-124.
- Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 975-1009.
When requesting a correction, please mention this item's handle: RePEc:ris:adbewp:0385. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Maria Susan M. Torres)
If references are entirely missing, you can add them using this form.