Sources of Economic Fluctuations in East Asia from 1980 to 2006——Analysis basing on panel VAR

Recently, there has been renewed interested with respect to emerging-market countries in the age-old question of the macroeconomic fluctuation for the frequent crises in these countries. This paper quantifies the impact of six different shocks, using a panel vector auto-regression approach and determines their contributions to macroeconomic volatility in East Asian economies. In general, the impacts of supply shock, exchange rate shock, external demand shock, and world interest rate are the main sources of fluctuations. Exchange rate is the main transmit channel of external shocks, while the inflation rate mainly transmits the domestic shocks. Based on the empirical results of this study, we can conclude: First, the output instability experienced by these economies is largely the result of internal factors. A favorable supply shock leads to the increase of domestic output, but the effect can last after 2 periods. It means that large inputs without structural reforms can’t lead to the continuous economic growth. The shock of exchange rate explains one-third of the output fluctuations, but there is no “devaluations effect”, which means that devaluation isn’t an effective way to stimulate the economy. Moreover, given the high dependence of East Asia on the export trade, the role of external demand shock is important in the output fluctuations. Favorable external demand shock leads to the increase of domestic output. Second, positive external demand shock leads to the appreciation of the currency, while the high world interest rate will diminish capital flows into sample economies and lead to the depreciation of the currency. Third, the self-fulfilling of the inflation is the main source of its fluctuations, which is much more evident in the case of Cost-push inflation. The exchange rate shock can explain one-fifth of the price fluctuations.