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Contents Introduction

The objective of this paper is to examine the contagious nature of the Asian Crisis by analyzing the key features of business cycles of the Crisis countries. We study the validity of the two prevailing explanations of the Asian contagion: (1) propagation of adverse shocks and international investors' behavior, and (2) symmetric problems in domestic economic fundamentals. First, we categorize various propagation channels into trade, financial and pure contagion channels, and evaluate their relative importance. Then, we examine the business cycle comovements of several macroeconomic aggregates to investigate whether these countries share similar cyclical properties. We also analyze the role of common shocks that the region faced before the Crisis. This allows us to evaluate the role of domestic fundamental problems in explaining the contagious nature of the Crisis. The results suggest that the transmission of shocks through the trade channel can explain only part of the Asian Crisis and that the financial channel and domestic fundamentals together play a significant role in most countries.