Asian Business Cycle Synchronisation

HKIMR Working Paper No.06/2011

37 Pages Posted: 10 Mar 2011

See all articles by Dong He

Dong He

Hong Kong Monetary Authority; Hong Kong Institute for Monetary Research (HKIMR)

Wei Liao

International Monetary Fund

Date Written: February 25, 2011


This paper develops a multi-level structural factor model to study international output co-movement 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.

Keywords: Business Cycle Synchronization, Asia’s External Dependency, Decoupling, Multi-Level, Factor Model, Structural VAR

Suggested Citation

He, Dong and Liao, Wei, Asian Business Cycle Synchronisation (February 25, 2011). HKIMR Working Paper No.06/2011. Available at SSRN: or

Dong He (Contact Author)

Hong Kong Monetary Authority

3 Garden Road, 30th Floor
Hong Kong
Hong Kong

Hong Kong Institute for Monetary Research (HKIMR)

3 Garden Road, 8th Floor
Hong Kong

Wei Liao

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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