Identifying aggregate demand and supply shocks in a small open economy

Enders, W. & Hurn, Stan (2007) Identifying aggregate demand and supply shocks in a small open economy. Oxford Economic Papers, 59(3), p. 411.

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The standard Blanchard-Quah (BQ) decomposition forces aggregate demand and supply shocks to be orthogonal. However, this assumption is problematic for a nation with an inflation target. The very notion of inflation targeting means that monetary policy reacts to changes in aggregate supply. This paper employs a modification of the BQ procedure that allows for correlated shifts in aggregate supply and demand. It is found that shocks to Australian aggregate demand and supply are highly correlated. The estimated shifts in the aggregate demand and supply curves are then used to measure the effects of inflation targeting on the Australian inflation rate and level of GDP.

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9 citations in Scopus
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6 citations in Web of Science®

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ID Code: 32525
Item Type: Journal Article
Refereed: Yes
DOI: 10.1093/oep/gpl029
ISSN: 1464-3812
Subjects: Australian and New Zealand Standard Research Classification > ECONOMICS (140000) > APPLIED ECONOMICS (140200)
Deposited On: 07 Jun 2010 01:26
Last Modified: 29 Feb 2012 13:33

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