Aggregate Shocks Decomposition for Eight East Asian Countries

Every economy experiences peaks and troughs in its business cycle. It has always been the researchers’ interests to identify the underlying causes of shocks. In the business cycle literature, there exists a new strand of methodology that allows the analysis at a disaggregated level using the dynamic factor model. This model allows the decomposition of aggregate shocks into country-specific, regional and world common business cycles for eight East Asian economies of China, Japan, Korea, Indonesia, Malaysia, the Philippines, Singapore and Thailand. It therefore allows the identification of causes for major events experienced by these countries. Empirical evidences show that country factors are the most important causes of major events for all these countries examined here, implying the needs to rely more heavily on its own independent counter-cyclical policies. The region factor is largest for the most developed economies in the region such as Japan, Korean and Singapore, indicating that a regional coordinated policy is more effective for these economies to respond to the disturbances. The world factor explains only 8% of the output variation in East Asia for the median country. In addition, the examination of the contribution of world, region and country-specific factors to the major economic fluctuations of each East Asian country in the past decades shows that the role of world factor is insignificant (with the exception of the first oil shock in 1974). This might explain why the world economy was stabilised through periods of US slowdown by the East Asian economies.