Macroeconomic Interdependence in East Asia

Abstract

This paper analyzes macroeconomic interdependence among 10 Asian economies. In this connection, we decompose their macroeconomic activities (real GDP) into common and country-specific components using the Bai-Ng method (2004). Our results suggest first that both components are nonstationary and have permanent effects on their overall economy. Second, we find the relative importance of common factors in all countries in terms of their contribution to variations in real GDP. But evidence is also obtained of country-specific effects becoming increasingly important in countries like China in recent years. Therefore, if, for example, China is expected to grow at a fast pace in future, our findings imply that creation of a regional monetary union of these 10 countries needs to be held back until the Chinese economy has become more dominant in the region.Asian economic integration, factor models, common and factors