Linkage of Business Cycles

Linkage of Business Cycles in the countries of East Asia after the currency crisis

In this article, we study the links between economic cycles in the five East Asian countries (South Korea, Malaysia, Philippines, Singapore and Thailand). The debate on economic integration is being accelerated in the region, and the possibility of a policy coordination of the exchange rate beyond free trade agreements has been considered. The assessment in terms of welfare is required before this type of economic integration can be implemented. According to the theory of optimum currency areas, the existence of a similar shock of the offer is required for such policy coordination.
As a first step, we calculate the supply shocks and demand shocks in the countries of East Asia using SVAR, and noted the similarity of the supply shocks. Second, the turning points of the economic cycles were estimated using the Markov switching model. If turning points are caused by supply shocks, the similarity was again observed.
The findings were as follows. First, the significant correlation was observed between the supply shocks of the East Asian countries as a result of calculation by using structural VAR. The importance of correlation shocks in demand is less than the supply shocks correlation. In addition, as the results of the Markov switching model estimation, we saw a possibility that the turning points of the business cycle in the East Asian countries have important relationships. Some of turning points could have been transmitted by shocks from other regions, but we found that there is a unique link between the countries of East Asia.
It is not easy to observe directly the supply shocks such as external shocks, which is usually seen through the estimate. Although the reliability of the estimate using a method is not sufficient to achieve concrete results, the results of several methods tried in this paper suggest the possibility that supply shocks in the countries of East Asia has a high degree of similarity. According to the theory of optimum currency areas, the results could be regarded as results to support the introduction of a single currency system in the region.