Real output co-movements in East Asia: A cointegration approach

Document Type

Conference Proceeding

Publisher

Modelling and Simulation Society of Australia and New Zealand

Faculty

Faculty of Business and Law

School

School of Accounting, Finance and Economics

RAS ID

8155

Comments

Sato, K., & Zhang, Z. (2005). Real output co-movements in East Asia: a cointegration approach. In MODSIM 2005 International Congress on Modelling and Simulation, Melbourne, Australia (pp. 13-17). Available here

Abstract

The East Asian region has experienced astonishing economic growth and was widely cited as an exemplar of sustained economic growth over the past few decades. Compared to the European experience, regional integration in East Asia has occurred in the absence of a formal institutional framework, and is more market-driven. Such a trend towards spontaneous regional integration is a result of progressive outward orientation of individual economies' trade and investment policies, and the unilateral liberalization of goods and capital markets. High degree of integration in the East Asian region would greatly shape the economic structure of each individual economy and has direct implications for the effectiveness of domestic stabilization policy and policy coordination. It is therefore the major objective of this paper to empirically examine the feasibility of forming a monetary union in East Asia by assessing the real output co-movements among these economies. As suggested by the optimum currency area theory (OCA) that losing monetary independence would be the major cost for adopting a common currency, it would be less costly for the economies to form a monetary union if the business cycles are synchronized across countries. In recent years, there has been a number of studies empirically assessing the feasibility of forming a monetary union in the East Asian region from a symmetric shock perspective (see Bayoumi and Eichengreen, 1994; Bayoumi, Eichengreen and Mauro, 2000; Zhang, Sato and McAleer, 2004). In contrast to the previous studies, the present paper adopts the Johansen (1991) maximum-likelihood procedure to examine the co-movements of real outputs among the East Asian economies during the period 1978-2004. In particular, we perform the bivariate cointegration test for each pair of the East Asian economies to determine the long-run (cointegrating) relationship of the real output variables, and estimate the short-run dynamics of this relationship as well as analyze the contemporaneous output correlation and cyclical co-movement. Following Vahid and Engle (1993), we finally conduct a common feature test to detect the presence of common business cycles among the paired economies. The results suggest that the long-run synchronous movements of real outputs are perceived in the North East Asian area including Japan and China as well as the ASEAN economies. The test results from conducting the Vahid and Engle (1993) common serial correlation cycle tests provide further evidence in support the finding of the output co-movements in these areas. Both suggest that the high degree of integration through the flows of trade and capital in the East Asian region has greatly shaped the economic structure of each individual economy and contributed to the business cycle synchronization and co-movements of real output variables in both the short run and the long run. This has important implications for the economies in terms of adjustment costs when considering the adoption of a monetary union.

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