Output Adjustment in Developing Countries: a Structural Var Approach

This paper examines whether temporary fluctuations in output around potential in developing countries are induced primarily by aggregate demand shocks or temporary aggregate supply shocks. Structural vector autoregression methodology using long-run restrictions is used to identify temporary output shocks for a large sample of developing countries. Impulse response functions are used to examine whether the temporary shocks behave like demand or supply shocks. The permanent/transitory decomposition appears to split the shocks into permanent supply shocks, and temporary demand or supply shocks depending on which influence dominates in a particular country. In a little over half of the countries, temporary shocks behave like temporary aggregate supply shocks; in a little under half of the countries the temporary shocks behave like aggregate demand shocks.