Business cycle synchronization in the Asean: degree and driving forces

Abstract

Business cycle synchronization can be understood as the symmetric movements of business fluctuations over a timeframe. In the event of economic shocks, the degree of business cycle synchronization will indicate if a country can rely on its economic policy to overcome the shocks or it needs the policy coordination from other countries. Business cycle synchronization is perceived as one of the irreplaceable criteria to assess the degree of regional economic integration. The ASEAN is currently at the stage which can be considered to resemble the early stages of the European Union. Most ASEAN countries are also members of the Asia-Pacific Economic Cooperation (APEC) forum, so the concept of business cycle synchronization becomes more and more important. Empirically, there are few studies that incorporated the term “business cycle synchronization” in the analysis of a potential currency union in ASEAN. However, such a study that can explore the matter directly is hard to find. This study is conducted to evaluate the degree of the business cycle synchronization in the 10 ASEAN economies from 2000-2016. Additionally, the study expects to uncover the driving forces that lead to the synchronization of business cycles in the region. To overcome the limitation of the old measuring technique and data constraints, this study makes use of the new measure of business cycle synchronization using Abiad, et al. (2013)’s instantaneous quasi-correlation measure. A growing literature has also shortlisted three candidates for the determinants of business cycle synchronization: trade intensity, similarity of industrial structures, and financial integration. These three variables are tested for their explaining powers in a regression model. To reduce the possibility of the endogeneity problem, control variables (the product of log GDP, the product of log population and per capita GDP difference) are added to the model to control for omitted-variables bias. Also, lagged values of right-hand side variables are used to prevent the reverse causality. To purge the autocorrelation and heteroskedasticity existed in the model, the Feasible Generalized Least Squares estimator is the main estimation method in this study (OLS and Random-effects results are used as references). The calculation using new measure signifies that the degree of business cycle synchronization in ASEAN is moderate from 2000-2016. The level of synchronization reaches to the highest points in 2009, which was the time when the effects of global financial crisis took place. Correlations of business cycles among ASEAN-5 members are generally higher than among the CLMV group, or among the whole region. The regression-based analysis from this study also presents some key findings. Bilateral trade intensity and the similarity of industrial sectors are positively correlated with the synchronization of business cycles. Their explaining powers are robust and consistent across models. The mutual capital control is likely to weaken the degree of synchronization. Capital control is not significant in OLS estimate, fairly significant in Random-effects model, but highly significant in FGLS model. In summary, empirical evidence from this study underlines the three positive determinants of cycle synchronization: (i) trade integration; (ii) industrial similarity; and (iii) financial integration. As such, relevant policy implications are also discussed.