Deepening Interdependence in the Asia-Pacific Region: An Empirical Study Using a Macro-Econometric Model

Koichiro Kamada, Ko Nakayama and Izumi Takagawa
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Ko Nakayama: Bank of Japan
Izumi Takagawa: Bank of Japan

Bank of Japan Working Paper Series from Bank of Japan

Abstract: The development of an international division of labor across the Asia-Pacific basin was not only foundation for achieving the "East Asian Miracle," but also proved during the "Asian Currency Crisis" to be a possible trigger for an international chain reaction of economic bankruptcy. The purpose of this paper is to construct a macro-econometric model for the Asia-Pacific area, including Japan, the United States, Indonesia, Singapore, Thailand, the Philippines, Malaysia, South Korea, Hong Kong, and China. The model captures international specialization among regional neighbors in a simple way and enables us to quantify how their deepening interdependence affects economic activities in the area. Our main findings are as follows: (i) A Japanese recession may cause recession in East Asia and thereby rebound on Japanese exports. (ii) The depreciation of the Japanese yen favors its exports, but has a "beggar-thy-neighbor" effect on the East Asian economies. (iii) Foreign-demand shocks affect Japanese exports differently, depending on whether the shocks come from, say, the US or Asia. Moreover, the model includes policy rules (interest rate policy, exchange rate policy, and capital controls) to reflect the differing monetary policies observed in individual countries. These make it possible to simulate a change in a country's adopted policy rule and to quantify the effects of such a change, both on other countries and on itself. Using this model structure, we investigate which currency regime is most favorable for the East Asian economies. Our simulation results imply that (iv) it may be more desirable than the current policy regime or the US dollar peg that all the East Asian economies adopt the currency basket policy in order to preserve economic stability against turbulence arising inside or outside the East Asian economies.

Date: 2002-12
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