The Dynamics of Business Cycle Connectedness and the Decoupling of Asia-Pacific

International Journal of Finance & Economics

Tsolmon Otgonbat, Davaajargal Luvsannyam, Khuslen Batmunkh, Victor Pontines

F44

decoupling, network, Asia-Pacific, business cycle, connectedness

We assess the dynamic business cycle connectedness of Asia-Pacific economies and revisit the related issue of the validity of the hypothesis of decoupling from the United States by these economies. We find a host of interesting results: First, the dynamic business cycle connectedness of these economies is increasing over time. Second, a group of upper-middle income economies, namely, Malaysia and Thailand, and in recent decades, China, have shaped the dynamics of growth in the region, which suggests that the methods we employ in this study can pick-up the value-added production chains, for which these economies are a central part. Third, by and large, two blocs of economies have formed over time in terms of closer bilateral connectedness , that is, the ASEAN-5 (Indonesia, Malaysia, Philippines, Singapore and Thailand), and a relatively looser formation among the three Northeast Asian economies of China, Japan and Korea. Finally, we find no evidence that the region has completely decou pled from the United States over time. However, one new dimension we discover is that the nature and intensity of the business cycle connectedness of the region vis-à-vis the United States tends to vary over time, both on an aggregate and bilateral level. These findings highlight the need to go beyond static analysis and to utilize a dynamic approach for growth cycles within and outside the region.