Business cycles synchronization in East Asia: A Markov-switching approach

Abstract

This paper attempts to analyze the relationships between the ASEAN-5 countries' business cycles. We examine the nature of business cycles correlation trying to disentangle between regional spillover effects (expansion and recession phases among the ASEAN-5 are correlated) and global spillovers where the business cycles of other countries (China, Japan and the US) play an important role in synchronizing the activity within the ASEAN-5. We employ a time-varying transition probability Markov switching framework in order to allow the degree of synchronization to fluctuate over time and across the phases of the business cycles. We provide evidence that the signals contained in some leading business cycles can impact the ASEAN-5 countries' individual business cycles.Keywords: OCA, East Asia, Business Cycle Synchronization, Monetary Union, Markov-Switching JEL: C32, E32, F33 IntroductionThe question of monetary integration in East Asia has become a highly debated issue since the Asian 1997-98 crisis. According to many economists, the peg of their currencies to the US dollar was a source of financial fragility which led to the crisis. As a result, the leaders in the region wondered about the necessity of adopting cooperative financial and monetary policies to protect their economies against a new exchange rate crisis. 2 Some initiatives were undertaken with the adoption of reforms aiming, on the one hand at restructuring and increasing the depth of the financial systems (Asian Bond Fund and Asian Bond Market Initiative), and, on the other hand, at setting up mechanisms of protection against speculative attacks (Chiang Mai Initiative).

The Determinants of Indonesia’s Business Cycle

“…national trade and capital markets such that business cycle fluctuations in a given country is usually transmitted to others. Dufrénot and Keddad (2014) in their study with a Markov-switching approach also provide evidence that the signals contained in some regional and global leading business cycles can impact business cycle in some ASEAN countries, furthermore their finding suggests that ASEAN economies are characterized by a strong dependence on external demand. In the Indonesian context, Silalahi, Wibowo, and Nurliana (2012) show that international shocks affect the bank lending.…”

A Test of Using Markov-Switching GARCH Models in Oil and Natural Gas Trading

“…The use of MS models has been tested and suggested in several fields of research in economics, finance, and even meteorology or energy (turbine) engineering [10,11,35,36]. The first test was the estimation of the probabilities that a given country is in a recession regime (k = 2) or expansion regime (k = 1) at t + n [12,13] and, closely related, these models were used to test the potential presence of common changes in economic cycles [13,[15][16][17]. Other noneconomic applications are the modeling of temperature or wind speed modeling and forecasting [37][38][39][40].…”

“…Confirmation of the presence of correlation clustering has been probed by several studies such as [10][11][12][13][14] which are some of the most recent and closely related studies to this paper. Additionally, [15][16][17] found evidence of correlation clustering, by measuring this effect in two regimes. In these cases, similar to this paper, the authors split the states of nature (or regimes) into two regimes, as follows:…”

Testing an Algorithm with Asymmetric Markov-Switching GARCH Models in US Stock Trading

“…Furthermore, as additional outputs of these models, the analyst can estimate the probability ξ s,t of being in each regime s at t, along with a regime transition probability matrix from t − 1 to t (Π). This use has several applications, such as the forecast of recession episodes [22,25,26] or the level of volatility spill-over between financial markets in distress periods [27][28][29][30][31][32].…”