Business cycle synchronisation in East Asia: The role of value‐added trade

Abstract

We empirically investigate the relationship between business cycle synchronisation and the role of value‐added trade focusing on a panel of 12 Asian countries from 1995 to 2011. In addition, we propose the inclusion of two novel determinants, for example external value‐added trade intensity and exchange rate volatility and also saturate our empirical model with other common determinants found in the literature. Our findings first confirm that value‐added trade intensity, rather than gross trade intensity, has a sizable, positive and statistically significant impact on synchronisation among East Asian countries. Second, the exchange rate volatility has a significant negative effect on the business cycle synchronisation, which verifies that the exchange rate volatility is another important determinant of business cycle synchronisation. Our findings have important implications for the monetary cooperation in the region: strengthening trade linkage could reduce the costs of monetary cooperation by increasing the incidence of symmetric shocks.

The Effect of Trade Integration on Business Cycle Synchronization in East Asia

“…The previous studies also examine the impact of financial integration on BCS (Harding & Pagan, 2006;García-Herrero & Ruiz, 2008;Schiavo, 2008;Lee & Azali, 2010;Jiang et al, 2019;Padhan & Prabheesh, 2020). Morgan, Rime, and Strahan (2004) suggest that in a more financially integrated world institutions would decrease lending and reallocate the fund to others causing cycles to further diverge.…”

Prediction Errors of Macroeconomic Indicators and Economic Shocks for ASEAN Member States, 1990-2021

“…east Asia based on shortterm macroeconomic indicators, given that regional economic integration has rapidly advanced since the 1990s. It is shown that the key for business cycle synchronization in East Asia is trade integration, including regional supply chains promoting intraindustry trade and product fragmentations (Shin andWang, 2003, Cortinhas, 2007;Rena, 2007;Allegret and Essaadi, 2011;Takeuchi, 2011;Rena, Cheng, and Chia, 2012;Gong and Kim, 2013;Li, 2017;Sng, Dou, and Rana, 2017;Jiang, Li, and Zhang, 2019). Some economists assert that the advancement of financial integration is also positively or negatively associated with business cycles through capital market liberalization (Rena, 2007;Pontines and Parulian, 2010;Gong and Kim, 2013;Kim and Kim, 2013;Xie, Cheng, and Chia, 2013).…”