Trade Integration and Business Cycles Synchronization: a Case Study of East Asia

Abstract

A proposal of building a regional monetary union has been put forward after 1997 Asian financial crisis, but opinions about benefits and costs of joining a monetary union vary in academic background. According to the theory of Optimum Currency Area, trade integration and business cycles synchronization are two major criteria for measuring benefits and costs of joining a monetary union. The main research purpose of this paper is to track dynamics of trade integration in East Asia and its impacts on converging East Asian economies, which has important implications for building a regional monetary union. Based on empirical analysis, the paper suggests that business cycles in East Asia have been synchronized by increased intra-industry trade and strengthened macroeconomic policy coordination over last two decades. However empirical evidence related to the impact of trade intensity on business cycles synchronization is ambiguous, because of diversities and heterogeneity across East Asian economies the impact of trade intensity tends to be negative. On the other hand, regression results suggest that trade connection with the United Sates and the United States economic growth negatively affected co-movement of business cycles of East Asian economies. Trade integration in East Asia has been enhanced over last 20 years and the degree of business cycles synchronization has been increased in the region, though building a monetary union is still a long-run goal for East Asian regionalism as lack of political consensus, lack of feathered region-wide institution and lack of close coordination in financial and monetary field.