The Source of Shocks and the Role of Exchange Rate as a Shock Absorber: A Comparative Study in the Crisis-hit East-Asian Countries

Siok Kun Sek

doi:10.5539/jmr.v2n1p123

Abstract

Focusing on several crisis-hit East-Asian countries, this paper seeks to uncover the main source of shocks and its link to the performance of policy regime in these countries between the two sub-periods of pre- and post-crisis. A comparative structural VAR analysis is conducted to study the dynamic of shocks. The results show that the economies of East-Asian countries are mainly driven by domestic shocks and shocks are asymmetric. External shocks have low effects on domestic variables but they are increasing over time. Given that real exchange rate reacts stronger to real economy but lower to its own shock, and that the economies tend to experience real depreciation and lower volatility in inflation in the post-crisis period, the results imply more effective policy and greater role of exchange rate to act as a shock absorber under floating exchange rate regimes aftermath the crisis.

Highlights

The understanding in the business cycle fluctuations and the economic structures are of emphasized as they provides us the information on the source and the transmission mechanism of shocks which are important in the design of effective monetary policy and for the evaluations of policy regimes
All the variables are in first differenced log term. εt consists of six shocks, i.e. foreign supply shocks, foreign policy shocks, foreign demand shocks, domestic supply shocks, real exchange rate shocks and domestic demand shocks
Applying the unit-root test of Augmented Dicky-Fuller (ADF) to the two sub-periods sample shows that in most cases, these variables are not stationary in their levels but they are stationary in differenced terms

Summary

Introduction

The understanding in the business cycle fluctuations and the economic structures are of emphasized as they provides us the information on the source and the transmission mechanism of shocks which are important in the design of effective monetary policy and for the evaluations of policy regimes. The nature of shocks or the source of business cycle fluctuations is closely linked to the policy regimes. On the other hand, fixed regimes are preferred under more prominent domestic or nominal shocks (Cavoli & Rajan, 2003). This implies that the nature of shocks is crucial in determining the performance of policy regimes. Policy regimes could be matter in determining the transmissions and influences of shocks (Desroches (2004) and Hoffmaister et al (1997))

Methods

Results

Conclusion