This paper investigates business cycles in Asia. Business cycles in developing small, open countries are different from those in developed small countries. Most interesting characteristics in developing countries are excessive consumption volatilities and strong countercyclical net export. Asia and Latin American developing countries share these characteristics. However, there are also differences in business cycles in both regions. We find that Asia shows less excessive consumption expenditure volatility to output than Latin American countries, and strong countercyclical net exports. More interestingly, the durable consumption is negatively related with net export in Asia (Korea), while Latin America (Chile) shows positive correlation. Moreover durable consumption shows a negative relationship with export and import while durable consumption in Latin America has positive relationship with export and import. We believe that there exist different transmission mechanisms in Latin America and Asia that connect consumption, net exports and export or import. We find that positive terms of trade shock increase the real GDP significantly in the short run for Latin America, but have no significant effects for East Asia. However, response of net exports to the terms of trade shocks is stronger and more persistent in Asia than in Latin America. This paper also present an analytic model that could explain the durable goods business cycles in Asia.
The model can explain durable business cycles in Asia (Korea) which generate strong procyclical durable consumption by the export-income channel with market laddering.