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International Capital Flows and Boom-Bust Cycles in the Asia Pacific Region +

This paper documents evidence of business cycle synchronization in selected Asia Pacific countries in the 1990s. We explain business cycle synchronization by the channel of international capital flows. Using the VAR method, we find that most Asian countries experience boom-bust cycles following capital inflows, where the boom in output is mostly driven by consumption and investment. Empirical evidence shows that capital flows in the region are highly correlated, which supports the conclusion that capital market liberalization has contributed to business cycle synchronization in Asia. We also find that business cycles in the Asian crisis countries are. | International Capital Flows and Boom-Bust Cycles in the Asia Pacific Region Soyoung Kim University of Illinois at Urbana-Champaign and Korea University Sunghyun H. Kim Tufts University Yunjong Wang SK Research Institute Abstract This paper documents evidence of business cycle synchronization in selected Asia Pacific countries in the 1990s. We explain business cycle synchronization by the channel of international capital flows. Using the VAR method we find that most Asian countries experience boom-bust cycles following capital inflows where the boom in output is mostly driven by consumption and investment. Empirical evidence shows that capital flows in the region are highly correlated which supports the conclusion that capital market liberalization has contributed to business cycle synchronization in Asia. We also find that business cycles in the Asian crisis countries are highly synchronized with those in Japan. JEL Classification F02 F36 F41 Key words business cycle synchronization capital flows boom-bust cycles financial integration. We are grateful to Gordon de Brouwer Barry Eichengreen Takeo Hoshi Takatoshi Ito Eiji Ogawa and Yung Chul Park for their helpful comments and suggestions. This research was kindly supported by a Ford Foundation grant. Department of Economics University of Illinois at Urbana-Champaign DKH 225b 1407 W. Gregory Drive Urbana IL 61801. Corresponding Author. Department of Economics Tufts University Medford MA 02155. Tel 617-6273662 Fax 617-627-3917 E-mail Sunghyun.Kim@tufts.edu. SK Research Institute 14th Floor Seoul Finance Center 84 Taepyungro 1-ga Seoul 100-101 Korea. 1 1. Introduction Over the past decade a number of Asia Pacific countries have liberalized their financial markets to foreign capital by reducing restrictions on inward and outward capital flows. Increased capital flows due to financial integration can generate substantial effects on business cycles. Large capital inflows following financial market liberalization can .