Business Cycle Synchronisation in East Asia

Abstract

Against the background of the rapid inter- and intra-regional integration of East Asia, we examine the extent and nature of synchronisation of business cycles in the region. We estimate various specifications of a dynamic common factor model for output growth of ten East Asian countries. A significant common factor is shared by all Asian countries considered, except China and Japan. The degree of synchronisation has fluctuated over time, with an upward trend particularly evident for the newly industrialised countries. Synchronisation appears to mainly reflect strong export synchronisation, rather than common consumption or investment dynamics. Cross-country spill-over effects explain only a small part of the comovement in the region. More importantly, a number of exogenous factors, such as the price of oil and the JPY-USD exchange rate, play an important role in synchronising activity. In addition, economic linkages with Europe and North America may also have contributed to the observed synchronisation.

Keywords: business cycles synchronisation, East Asia, dynamic factor model

JEL Classification: E30, F00