Revealed commonality: linkages in consumption, investment and output in East Asia

Abstract

There is a growing appetite in East Asia for thinking about ways to deepen economic and financial policy dialogue, cooperation and integration. This paper aims to inform that debate by examining what data on output, consumption and investment in East Asia reveal about linkages and commonality in the region. We apply time-series techniques to identify elements of commonality in East Asian output, consumption and investment data. We first set out the data we use for empirical analysis. US data are included to identify the relative importance of the United States to the region. We conduct four tests. First, we look for common trends in the variables using cointegration analysis. We then apply bivariate Granger-causality tests to output, consumption and investment growth to identify the short-run commonality in economic cycles in the region. We conduct latent factor analysis on growth rates in output, consumption and investment to identify common and idiosyncratic factors in these series. Finally, we look at the changing patterns and structure of correlations of consumption, purged of income effects, to measure financial integration in the region. As it turns out, these tests reveal much about the nature of linkages in the region.