Long before the recent subprime crisis became a global crisis, regulatory authorities, under the influence of the Basel Committee for Banking supervision, spent much effort on designing, harmonizing and implementing quantitative rules for prudential capital adequacy, but spent little effort on doing the same for liquidity. The crisis has changed this and has revived interest in liquidity regulations as a complement to solvency regulations (Rochet 2008), especially since high-capitalized banks may also suffer from funding liquidity strains in times of market turmoil. In a recent paper, the Basel Committee for Banking Supervision has outlined principles for sound liquidity risk management and supervision (Basel Committee 2008a). While in some countries, such as Italy and Spain, the liquidity regulations contain only qualitative requirements, in other countries, such as the United Kingdom and Germany, regulations specifying qualitative as well as quantitative requirements were installed several years ago (Algorithmics 2007).
Qualitative requirements, which are often based on the recommendation of the Basel Committee (2000), focus, inter alia, on the need for adequate information systems, required processes to assess future cash-flows, net funding requirements, and setting of internal limits (Basel Committee 2008b). Quantitative requirements, which specify liquidity relevant positions in simple rules, may be based on a stock approach that requires target holdings of liquid assets that can be drawn down, when needed and/or a cash-flow mapping approach that forces banks to match their cash in- and outflows. Both qualitative and quantitative requirements aim at limiting banks’ exposure to funding risk (i.e., the risk that the counterparties who supplied short-term funding will not roll over that funding and force banks to use other funding sources), and market liquidity risk (i.e., the risk that disruptions in securities markets may turn formerly liquid assets into illiquid assets). Such quantitative requirements are usually designed for normal market conditions, not for times of market turmoil when liquidity in the interbank or securities markets vanishes.
A recent study by the author on the asymmetry of (supply, monetary and real or demand shocks) shocks of the 5 largest economies of ASEAN (which were called the big5) strongly suggested that Singapore and Malaysia represent the core group, with Thailand close behind and Philippines and Indonesia constituting the periphery of ASEAN.
In actual fact, in that study, Singapore and Malaysia yielded the lowest cumulative long-run effect of supply, monetary and demand shocks to prices, output and real effective exchange rates. Thailand was close behind, the Philippines next and Indonesia was found to be country that experienced the largest asymmetric movements in the sample.
This paper studies the driving forces of business cycles within and across G-7 countries over the period 1961 to 2005. We use the term driving forces in the same manner it is employed in dynamic rational expectations models of the international business cycle variables taken to be exogenous in the model employed by the researcher. Most published work focuses on a single driving variable in isolation with the world divided into home and foreign locations. The most common driving variables are total factor productivity and monetary and fiscal policy shocks.
