Revisiting output-price Relations in East Asia

Why slower growth and high inflation can occur concurrently, while in other cases growth can be non-inflationary? Why did aggregate demand policy sometime fail to work, given an orthogonal shock? This study ponders on these queries by estimating the aggregate supply and aggregate demand curves in four East Asian countries. Applying the Structural Vector Auto-Regression (SVAR) with the restrictions a-la Blanchard and Quah, it is revealed that while the AD and AS curves in most cases follow the textbook definitions, in some countries the AS curve is so flat that demand expansion would have been effective to stimulate growth, and supply-based policies would be more desirable to control prices. We also found that during the crisis the supply shock played a more significant role in the price fluctuations, suggesting that focusing on AD management alone was not the best approach to take.