Academic journal article IUP Journal of Applied Economics

Macroeconomic Integration in Asia-Pacific: Common Stochastic Trends and Business Cycle Coherence

Academic journal article IUP Journal of Applied Economics

Macroeconomic Integration in Asia-Pacific: Common Stochastic Trends and Business Cycle Coherence

Article excerpt

This paper addresses the question of macroeconomic integration in the Asia-Pacific region. Economically, the analysis is based on the notions of stochastic long-run convergence and business cycle coherence. The econometric procedure consists of tests for cointegration, the examination of vector error correction models, different variants of common cycle tests and forecast error variance decompositions. Results in favor of cyclical synchrony can be partly established, and are even exceeded by the broad evidence for equilibrium relations. In this domain, several leading countries have been identified.

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The last few decades of economic development in Asia-Pacific1 were marked by vibrant dynamics, as the region has witnessed extraordinary growth, as well as striking inequality and severe crises. A recent example is the Asian Financial Crisis of 1997-98, which occurred in a period of booming economy and deepening interaction between the region's countries. While some nations could make considerable progress, others had far less participation in the dynamic development process. As a matter of fact, the members of the main regional organizations, like ASEAN and APEC, range from highly industrialized to developing countries, and the integration concepts include 'open regionalism' to discriminatory trade policies. Until now, progress in convergence is driven more by market mechanisms than by institutionalized cooperation.

From the empirical point of view, it remains an open task to examine the ambiguous character of the economy of Asia-Pacific, even after some studies, mainly on shock identification and income convergence (Bayoumi and Eichengreen, 1994; Lee et al ., 2004; and Weber, 2007), have shed light on this topic. The special regional scenery with its varying economic conditions and political historical backgrounds raises several questions: Does Asia-Pacific justify using the notion of one economic region? In detail, do the different national economies share common structural properties, and do the mutual interlinkages boost transmission effects between them? Given incomparable stages of industrialization, is there any evidence for the presence of several highly integrated regional subgroups? And furthermore, is it possible to extract a leading role played by any one nation, or at least to determine a certain direction of the overall adjustment pattern?

Answering these questions would not only give a more profound insight into the functioning and structure of the world's most dynamic and forward-looking region, but also provide important information for understanding the difficulties in making sustained progress and ensuring macro stability despite the high vulnerability, which has been a permanent threat in the past. In this context, enhanced cooperation based on a deepening integration could bear high potential for stabilization policies.

This paper approaches the outlined problems in the context of a time series analysis, which proceeds on an aggregated macro level. This allows processing the entire information manifested in the development of the relevant indicators, mainly the Gross Domestic Product (GDP) in the present case. The examination makes use of recent econometric advantages in the field of common features, namely, the analysis of common stochastic trends and common cyclical dynamics provide adequate means for finding evidence about stance and course of a macroeconomic convergence. The proceeding differs from the main approaches in the existing literature, which focus, for example, on the identification and comparison of national supply and demand shocks (Bayoumi and Eichengreen, 1994), or cross-section panel convergence (Engelbrecht and Kelsen, 1999). Furthermore, the paper explicitly considers the recent structural breaks in the Asian economies, utilizes a very flexible concept behind the notion of business cycle synchrony, and inquires into the conditions of economic leadership and dependence. …

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