Essays on the transmission of international shocks in east Asian economies

Growing economic integration and trade liberalization have increased economic openness and created interdependencies among various regions and economies. These developments changed the structure of global trade over time, along with the significance of channels through which economic shocks permeate globally. Over the last 20 years, the transmission mechanisms have widely evolved due to prominent changes in trade patterns between Asia and the rest of the world. The evolution of economic linkages across emerging Asian economies is prominent and has gained global importance due to its widespread implications for global markets. Therefore, there is a growing interest in modelling the changing influence of economic shocks emanating from major economies in the Asian region. However, due to rapidly changing policies, economic landscapes and short data samples, modelling the macroeconomic relationships in the small open economies of Asia is complex and provides significant limitations for implementing traditional econometric frameworks. This dissertation consists of three distinct essays that attempt to illustrate the evolution of international transmission mechanisms. In the first essay, we investigate the effects of the increasing importance of ASEAN-4 (Indonesia, Malaysia, the Philippines and Thailand) and NIE-4 (Hong Kong, Singapore, South Korea and Taiwan) economies in global trade for the transmission of shocks using a structural VAR framework. We specifically account for time variation, using the changing trade links to provide a means of identifying the propagation of economic shocks and spillovers across the US, EU and the Asia Pacific economies from 1978-2015. We analyse the evolution of changing trade patterns on the direct and indirect effects of a shock via fluctuations of output growth in the major trading partners of ASEAN-4 and NIE-4. The results show evidence of China's emergence as a major driver of growth in Asian markets. The identification mechanism highlights the relative importance of changing trade relationships versus changing shocks in propagating shocks between global markets and the selected Asian economies. The results show that the international transmission mechanisms have changed substantially over the sample period. Understanding fluctuations in macroeconomic aggregates is fundamental in understanding the dynamics of business cycles for decision making. Particularly, due to the changing nature of economic and financial linkages in global markets, it is important to assess the implications of global and regional shocks on cyclic movements across emerging Asian economies. Therefore, in the second essay we examine the degree of business cycle fluctuations across emerging Asian countries and the growth driver (G4) economies namely US, EU, Japan and China. We adopt a multilateral latent factor model to study the time-varying nature of common world components in macroeconomic aggregates (output, exchange rate, inflation and interest rate) in a set of 14 countries over the period 1979-2018. The dynamic latent factor model enables us to examine the commonalities in economic activity across emerging Asian markets and the G4 in synchrony across the fundamental macroeconomic aggregates. We focus on the changing role of the world, region and country-specific factors to explain international business cycle synchrony across Asian economies. We assess the significance of each component over seven distinct time periods, to illustrate their dynamic features in determining the cyclical movements of fundamental macro-aggregates. Our findings illustrate the increasing importance of a common world factor in determining fluctuations in the aggregates in most of the sample economies. In addition, the results show that the volatility in economic activity attributable to region-specific factors is not significant in most cases. More specifically, we observe a decline in the regional volatility for most of emerging Asian countries in output, exchange rate and interest rate; however, there is a little evidence of inflation synchrony in ASEAN economies over time. We find that the cyclical output movements in both the G4 and emerging Asian economies have become more synchronised over the period 2000-2018. On average, the common world factor accounted for 48% of the variation in the output growth of ASEAN and NIE regions. Similarly, the contribution of the common component to inflation and exchange rate have become more pronounced for most of the sample economies over time. In addition, more than 50% of the variation in the interest rate is attributed to a common shock in advanced countries except for the US, whereas for the Asian region it has only increased for Malaysia, Thailand and Korea in the past 20 years. In the third and final essay, we assess how economic and financial shocks propagate across small open East Asian economies during the post liberalization period. We examine the evolution of economic shocks across the NIE and ASEAN regions for the period 1980-2016, effectively linking the sample economies in a global framework. We demonstrate the implications of international shocks with alternative trade weights, incorporating the shift in global economic patterns over the past two decades. The approach specifically allows us to examine how responses of the NIE and ASEAN regions to exogenous shocks have altered over time. We find that the influence of Chinese-generated shocks on the Asian markets has magnified, while those of the EA and Japan have declined over time. Our findings indicate that the US economy is still the most important growth driver of Asian markets, but its influence is reducing slowly over time. We also analyse the dynamic responses of the ASEAN-4 and NIE-4 economies to a global oil price shock, the US interest rate and equity price shock. The results emphasize the changing role of economic and financial channels in the transmission mechanism of shocks across emerging Asia.