ABSTRACT
This chapter examines to what extent business cycles in the Pacific Rim countries are correlated and what factors cause these correlations to change over time. The degree of business cycle correlation is important for policy makers for various reasons. First, as pointed out byCrosby (2003), the domestic economymay react to disturbances in economies in close geographic proximity, or to larger but perhaps more distant economies such as the United States. Second, as pointed out by Genberg (2006), the increased trade integration among economies in the region has led to calls for coordination of exchange rate policies (or even currency unions)1
lest competitive depreciations lead to artificial distortions in competitiveness, disruptions of trade, and dislocation of production. Referring to the experience of Europe, it is often argued that such exchange rate cooperation is necessary now that the degree of integration of at least some countries in the region has reached levels close to that in Europe at the time the Exchange Rate Mechanism was introduced. However, monetary integration requires that business cycles of countries participating in a system of fixed exchange rates or a currency union are sufficiently aligned.
