This paper documents the evidence of business cycle synchronization in the selected Asia Pacific countries in the 1990s. We also find that business cycles in the Asian crisis countries are highly synchronized with those in Japan. We explain business cycle synchronization by focusing on the channel of international capital flows. Using the VAR method, we find that most Asian countries experience boom-bust cycles following capital inflows and that boom in output is mostly driven by consumption and investment. Empirical evidence also shows that capital flows in the region are highly correlated, which supports the conclusion that capital market liberalization contributed to business cycle synchronization in Asia.

Executive Summary

I. Introduction

II. Theoretical Overview
1. Financial Integration and Business Cycles
2. Trade Integration and Business Cycles

III. Trends and Stylized Facts of Business Cycles
1. Volatility of Business Cycles
2. Co-movements of Business Cycles

IV. Trends and Stylized Facts of Capital Flows
1. Current Account, Capital Account and Overall Balance
2. Components of the Capital Account

V. Capital Flows and Business Cycles: Empirical Studies
1. Vector Auto-Regression Model
2. Basic Model and Effects on Output
3. Effects on Other Marco Variables
4. Synchronization of Capital Flows and Business Cycles

VI. Conclusion

References