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A Factor-augmented VAR Analysis of Business Cycle Synchronization in East Asia and Implications for a Regional Currency Union

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  • Hyeon-seung Huh

    (Yonsei University, Republic of Korea)

  • David Kim

    (University of Sydney, Australia)

  • Won Joong Kim

    (Konkuk University, Republic of Korea)

  • Cyn-Young Park

    (Asian Development Bank, Philippines)

Abstract

Debate continues over whether a monetary or currency union will be a viable alternative to the current exchange arrangements in East Asia. The present paper adds to the literature by assessing the level of business cycle synchronization among 10 major East Asian countries, which is considered a key precondition for a regional currency union. Unlike previous studies, this paper employs a factor-augmented VAR 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 countries exhibit similar responses to world and regional shocks. Of particular importance is the finding that individual 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.

Suggested Citation

  • Hyeon-seung Huh & David Kim & Won Joong Kim & Cyn-Young Park, 2013. "A Factor-augmented VAR Analysis of Business Cycle Synchronization in East Asia and Implications for a Regional Currency Union," Working papers 2013rwp-58, Yonsei University, Yonsei Economics Research Institute.
  • Handle: RePEc:yon:wpaper:2013rwp-58
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    References listed on IDEAS

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    Cited by:

    1. Lai, Ya-Wen, 2017. "Macroeconomic factors and index option returns," International Review of Economics & Finance, Elsevier, vol. 48(C), pages 452-477.

    More about this item

    Keywords

    Business Cycle Synchronization; Asian Currency Union; Factor-augmented VAR;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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