Leu, Shawn

Sheen, Jeffrey

2011

We consider whether there has been a gradual decoupling of the Australian business cycle from its trading partners in Europe and North America and a closer convergence toward its trading partners in Asia. We set up a dynamic latent factor model to estimate common dynamic components or factors for the real GDP growth rate of 19 countries. From variance decomposition over the 1991-2009 sample, we find that a global factor contributed the most in explaining Australian output growth variations, followed by a European factor, an Asian factor, and finally a North American factor. However, the correlation between Australian output growth movements and the Asian business cycle factor evolved from negative and small to positive and large after 2002. The European and North American factors were negatively correlated with Australian output growth for most of the sample period before turning positive in the global financial crisis of 2007-2008. This evidence supports the hypothesis that the Australian economy has decoupled to some extent from Europe, was not much coupled with North America except insofar as the United States drove the global factor, and has increasingly become positively coupled with Asia.

The Evolving Role of Asia in Global Finance, v.9, p. 287-309

9780857247469

9780857247452

https://hdl.handle.net/1959.11/20318

Emerald Group Publishing Limited

Frontiers of Economics and Globalization

1

The Australia-Asia Business Cycle Evolution

Book Chapter

Publication