We investigate the determinants of business cycle synchronization in East Asia by
testing the robustness of the potential candidates, using the technique of Extreme Bound
Analysis in an OLS regression framework with Newey-West correction for
heteroskedasticity and autocorrelation. We find that trade openness and intra-industry
trade are major channels of business cycle synchronization. Although the similarity of
monetary policies is statistically correlated with degree synchronization, we are unsure
whether the former causes the latter or vise versa. The findings are probably good news
to the proponents of the prospective currency union. If the trend of increasing openness
and bilateral intra-industry trade continues in East Asia, it is expected that the costs of
forming a currency union would diminish as business cycles become more synchronized.