Output drops in ASEAN-5 countries: A business cycle accounting perspective

Abstract

ASEAN-5 countries have experienced several output collapses during the past half-century. Although attempts have been made to identify the underlying factors behind these output drops, how these factors lead to output drops remains underexplored. This study quantitatively investigates the sources of economic fluctuations from 1970 to 2017 in ASEAN-5 countries within the framework of a small open economy with four time-varying wedges. Particular attention is paid to the output drops in the 1980s and during the Asian Financial Crisis. The accounting exercises suggest that the efficiency wedge primarily drives output fluctuations in all countries. This study also ties the observed patterns of the efficiency wedge to some stylized facts, providing potential explanations for the wedge. Empirical evidence shows that financial disruptions coincide with efficiency wedge deterioration, indicating that models of financial frictions that translate into efficiency wedges are the most promising for explaining output drops in these countries.