Identifying shocks in regionally integrated East Asian economies with structural VAR and block exogeneity

Abstract

Abstract:In this paper we use a structural VAR model with block exogeneity to investigate if external shocks originating from the USA played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. The empirical results show a dynamic effect of external shocks, implying that, even though regional integration appears to be deepening and accelerating, especially after the recent global financial crisis, the influence of US shocks on real output fluctuations in the East Asian region is still very strong. The effects of Chinese shocks show an increasing trend over time, but the impacts are still small and not comparable with those of US shocks. The world oil price shock has become increasingly important in influencing the stability of real output growth in the region. The results from variance decomposition and impulse response analysis confirm the findings. Even though Japanese firms have established production networks in East Asia through trade and investment, and China has also grown rapidly and become a key regional country, the results suggest that US influence in the region is still asymmetric and strong. Therefore, it is difficult to conclude that shocks to the East Asian economies have become more regionally oriented.

The influences of international output shocks from the US and China on ASEAN economies

“…Compared with the results for the same sized US output shock the effects on ASEAN output are relatively small. This is consistent with the findings of Sato et al (2011). Fig.…”

“…Lee and Koh (2012) also examine the question of monetary union, but use a bivariate VAR framework. Sato, Zhang, and McAleer (2011) is closest to our study from a methodological perspective, and uses a structural VAR model with block exogeneity to investigate whether external shocks originating from the US played a dominant role in influencing the macroeconomic fluctuations in East Asia during the period 1978-2007. They find that the influence of US shocks on real output fluctuations in the East Asian region is very strong.…”

Can External Shocks Explain theAsian Side of Global Imbalances? Lessons from a StructuralVARModel with Block Exogeneity

“…Our model uses short‐run and long‐run restrictions and the exogeneity hypothesis. Following Maćkowiak () and Sato et al (), we impose the following constraints. The block exogeneity restriction implies that domestic structural shocks ε 2 ( t ) do not affect the vector of external variables y 1 ( t − s ) at time t or t − s .…”

The nature and propagation of shocks in the euro area: a comparative SVAR analysis

“…Correlation coefficients of shocks between countries are then used to evaluate the degree of similarity of business cycles. A number of subsequent papers followed this approach: among them, Chamie et al (1994), Ramos and Surinach (2004), Sato et al (2009), Zhang et al (2004) split demand shocks into real and nominal ones to include either monetary policy or exchange rates in the analysis. Chamie et al (1994) decompose shocks into a common and a specific component to measure their relative incidence on variables, while Ide and Moes (2003) distinguish between symmetric shocks, common to the euro area, and asymmetric ones, specific to European countries.…”

“…To investigate the first aspect, it identifies structural shocks and compares their pairwise correlations between countries, like done in SVARs models with long-run restrictions (Bayoumi and Eichengreen, 1993;Sato et al, 2009;Zhang et al, 2004;Khai, 2009). To examine the second aspect, it calculates the size of shocks and the speed of adjustment in response to shocks, in view of assessing the degree of resilience of member countries prior and after the creation of the monetary union.…”