Asian Business Cycle Synchronization

30 Pages Posted: 24 Feb 2012

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 2012

Abstract

This paper develops a multilevel structural factor model to study international output comovement and its underlying driving forces. Our method combines a structural vector autoregression with a multilevel factor model, which helps us understand the economic meaning of the estimated factors. Using quarterly data of real GDP growth covering 9 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 although the role of the global factors has intensified over the past 15 years for most of the economies, output fluctuations in Asia have remained less synchronized 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. Therefore, although emerging Asian economies cannot ‘decouple’ completely from the advanced economies, they have, nonetheless, sustained a strong independent cycle among themselves. We also find that synchronized supply shocks contributed more to the observed synchronization in output fluctuations among the Asian economies than demand shocks. This points to the role of productivity enhancement and transmission of other supply shocks through, for example, vertical trade integration, rather than dependence on external demand, as the primary source of business cycle synchronization in emerging Asia.

Suggested Citation

He, Dong and Liao, Wei, Asian Business Cycle Synchronization (February 2012). Pacific Economic Review, Vol. 17, Issue 1, pp. 106-135, 2012. Available at SSRN: https://ssrn.com/abstract=2010288 or http://dx.doi.org/10.1111/j.1468-0106.2011.00574.x

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
China

Wei Liao

International Monetary Fund ( email )

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

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