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“Decoupling” refers to the divergence of business cycles among different countries, while “re-coupling” corresponds to the convergence or the synchronization of business cycles among different countries. The decoupling debate is popular in the field of economics, especially after global financial crisis. As trade integration increased among Asian countries, business cycle synchronization among these countries was expected to increase through trade transmission. The aim of this study is to discover whether there has been decoupling or convergence of business cycles through various trade channels. However, theoretically, increased trade can lead to business cycle synchronization either rising or falling. Inter-industry trade resulting in higher specification will induce less synchronized business cycles, while intra-industry trade could lead to increased business cycle synchronization. Thus, it is important to distinguish between intraand inter-industry trade flows. Both correlation and dynamic factor models are utilized to study the evolution of global business cycle linkages. Results indicate that the world factor has become less important in explaining macroeconomic fluctuations from sub-period 1961-1984 to sub-period 1985-2007, while regional factors do not play an important role in explaining aggregate volatility, with the expectation of consumption. Overall, the explanatory power of country factors increases. Domestic consumption and domestic investment variances are more driven by country and idiosyncratic factors than by the world factor, contrary to the output growth fluctuations. Regional factors and country factors also play a more prominent role in explaining gross import fluctuations than in explaining gross exports. Results cast doubt on the strong forms of both the decoupling and the re-coupling hypothesis.

Asian Trade Integration and the Decoupling Debate of Business Cycles