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Abstract
The issue of decoupling of emerging market economies (EMEs) (especially in the Asian region) from the developments in advanced economies has become a subject of lively debate in recent years. Basically, decoupling seems to comprise three sub-hypotheses: (i) growth spillovers from advanced countries to EMEs decreasing progressively in importance, (ii) business cycles in EMEs becoming less synchronized with those of the advanced world and (iii) strengthening of growth spillovers and cyclical synchronization among the EMEs as a group. The received literature fails to distinguish adequately between the trend and cyclical aspects of the decoupling relationship. We resort to two frequency domain methods (nonstationary spectral causality testing and wavelet correlations), which seem to offer a neat separation of trend and cyclical decoupling. Based on a sample of seven EMEs from the Asian region (including the two large EMEs – China and India), we uncover strong evidence favouring both trend and cyclical decoupling.
We are grateful to the anonymous referee for all his valuable comments. Errors and shortcomings are the authors’ sole responsibility.
Notes
1. Willett et al. (Citation2011) offer a detailed discussion of the various senses in which the term decoupling has been used in the literature.
2. Thus, Fidrmuc et al. (Citation2008) focus on China, Jayaram et al. (Citation2009) on India and Hsiao et al. (Citation2003) study the impact of the US economy on the Asia-Pacific rim.
3. ‘Growth spillovers’ are likely to be influenced strongly by trade intensity and specialization, FDI (foreign direct investment) inflows, technology transfer and so on, whereas ‘business cycle synchronization’ would be driven by factors such as financial contagion, portfolio capital inflows, fiscal and monetary policy coordination and so on.
4. Data on IIP for the selected countries has been gathered from (i) IMF International Financial Statistics Database and (ii) Economist Intelligence Unit Database.
5. Korea became a full member of the OECD group in December 1996. Its classification as an EME is thus somewhat controversial, but we follow the current comparative development literature, which still persists with this classification (see, e.g. Chui et al., Citation2002; He et al., Citation2007 etc.).
6. The ‘common trends’ and cointegration approaches are more familiar to economists, but are somewhat vague as to how long is the long run. Similarly, the common cycles approach identifies only the existence of common cycles in multiple time series without being able to locate the exact periodicities to which the cycles refer.
7. The degrees of freedom are, however, adjusted to F[2, N – 3p].
8. In this case, the degrees of freedom need to be adjusted appropriately.
9. The mathematical properties of wavelets are discussed in Percival and Walden (Citation2000).
10. Our sample size is 226 for Period I and 240 for Period II (see discussion in Section IV below), and hence the maximum number of scales that we choose is six (see, e.g. Crowley, Citation2007).
11. The time scales in the wavelet decomposition may be loosely identified with cycles of the corresponding periodicities in the spectral decomposition. However, this identification is only approximate and subject to various qualifications (see Priestley, Citation1996; Hogan and Lakey, Citation2003, chapter 3).
12. The DWT is preferred to the MODWT in this context since the former approximately decorrelates a wide range of time series (see, e.g. Tewfik and Kim, Citation1992; Ramsey and Lampart, Citation1998 etc.).
13. Note that in computing the weight, we use the aggregate GDP, data on which is obtained from the Penn World Tables (version 7.0).
14. This choice maintains comparability with the wavelet correlations method.
15. In the case of China, the two methods give differing conclusions.
16. Our results thus seem to be in agreement with other earlier studies favouring the decoupling hypothesis (e.g. IMF, Citation2007; Akin and Kose, Citation2008; Athukorala and Kohpaiboon, Citation2009; Rossi, Citation2009 etc.).
17. This result unfortunately is not robust to the method of analysis chosen, and hence may need to be investigated further.
18. There is some evidence for intra-year linkages in the case of Korea, which we disregard since cyclical coupling/decoupling is usually defined with reference to the regular business cycle.