Aggregate Shocks Decomposition for Eight East Asian Countries

Abstract

Every economy experiences peaks and troughs in its business cycle. This paper employs Bayesian dynamic factor model which allows the decomposition of aggregate shocks into country-specific, regional and world common business cycles for the East Asian economies. It therefore allows the identification of causes for major events experienced by these countries. Empirical evidence shows that country factors are the most important causes of major events for all these countries examined here, implying the needs to rely more heavily on its own independent counter-cyclical policies. Though playing a less important role than the country-specific factor, regional factor accounts for a sizeable share of output fluctuation in the region. The regional factor is largest for Singapore, Korea, Malaysia and Thailand, indicating that a regional coordinated policy is relatively more effective for these economies to respond to the disturbances. The world factor explains only around 7 percent of the output variation in East Asia, which might explain why the East Asian economies are relatively insulated from the recent global financial crisis.

Keywords: Business Cycle, East Asia, Aggregate Shocks Decomposition, Dynamic Factor Model

JEL Classification: E3