Accounting for the economic relationship between Japan and the Asian Tigers

Abstract

This paper applies the business cycle accounting method of Chari, Kehoe and McGrattan (2007) to a two-country, two-good model based on Backus, Kehoe and Kydland (1994) to investigate the economic relationship between Japan and the Asian Tigers from 1980Q1 to 2008Q2. We find that the main driver of long-run shifts and short-run fluctuations in output in each economy is domestic production efficiency. Furthermore, the recent increase in the cross-country business cycle correlation between the two can be attributed to an increase in the cross-country correlation of production efficiencies.