Conclusion

In this short article, I tried to assess the impacts of the subprime mortgage crisis and oil price increases on Asian economies. I argued that the sub-prime mortgage crisis, while likely to slow down the US economy, its impact may not be large on Asian countries unless the crisis becomes fully blown. However, I also argued that the high inflation due to fuel and food price increases presents policymakers in Asian countries with a serious dilemma.

Recent studies have shown that East Asia is quite integrated in terms of trade. The financial integration is also progressing, but the extent of the financial integration is not as remarkable as trade integration is in East Asia. In contrast, East Asian countries'financial linkage to the global center (i.e., the US market) is quite strong. These studies also show that trade integration greatly enhances business cycle co-movements of output. There is also evidence that financial integration also leads to more co-movements of output, but its impact is relatively weak. Hence, the deepening trade integration in East Asia indicates that the impact of slowdown in the US economy is not likely to be large. Because the impact of financial integration is not significant, the fact that most Asian countries' financial markets have strong ties with the US financial markets does not necessarily dispute this prediction. There is a caveat: the crisis in the US should not be fully fledged. The evidence of weak impact of financial integration on business cycle co-movements is derived under a relatively calm situation.

On the other hand, the recent fuel price increases are of a more global nature. Most Asian countries, still heavily dependent on the manufacturing sector, are expected to be more adversely affected by the oil price increases than advanced countries. Now, the central banks of Asian countries face a dilemma between high inflation and economic slowdown. This will be the first serious challenge for many emerging Asian countries that have adopted inflation targeting.

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