The dynamics of aggregate demand and supply shocks in ASEAN countries

This paper revisits the issue of identification of aggregate demand and supply shocks in ASEAN countries using an alternative identification scheme where the aggregate demand and supply shocks are allowed to be correlated. Applying the technique of Cover, Enders, and Hueng (2006) within a bivariate Structural VAR model, this paper shows that aggregate demand and supply shocks are interrelated (positively) in ASEAN countries. Unlike most of the previous studies, it is found that changes in the output level are mainly driven by aggregate demand shocks, whereas supply shocks play the dominant role in affecting inflation in ASEAN countries. The correlation of the shocks across the countries is found to be quite small, suggesting that ASEAN is still not set to form a common currency union.