The Effects of Fiscal and Monetary Policies on Aggregate Demand (Output) in Selected Asian Economies: A VAR and Panel VAR Approach

Abstract

This thesis investigates the effects of fiscal and monetary policies on aggregate demand (output) in selected Asian countries. These countries have been classified into three groups. The first group comprises five SAARC economies: Bangladesh, India, Nepal, Pakistan and Sri Lanka. The second group consists of the ASEAN-5: Indonesia, Malaysia, the Philippines, Singapore and Thailand. The last group is made up of two countries: Hong Kong and Republic of Korea (hereafter Korea). The choice of these twelve countries was determined by three reasons. First, they have large populations, large resource bases, and large markets. They are also among the emerging economies in the world. Second, they are located close by in the same region. They are also integrated by trade and monetary unions. Finally, they have similar socio-economic characteristics. The time period 1974-2007 was chosen because, throughout this period, most Asian countries implemented structural reforms. ... The present thesis deals with the following research issues for each selected Asian economy. First, the influence of fiscal and monetary policies on aggregate demand (output) will be examined. Second, the relative strengths of various shocks at different time horizons will be determined. Third, the dynamic responses of output, money supply, government expenditure, the real exchange rate and the foreign interest rate to each type of internal and external shocks will be analysed. Finally, the relative effectiveness of fiscal policy and monetary policy on aggregate demand (output) for each country will be investigated. Throughout the thesis, both time series and panel data analyses techniques are utilized. In relation to the time series, specific techniques are applied to investigate the above issues. Using open IS-LM equations, the aggregate demand function is estimated as a function of real money supply, real government expenditure, the real exchange rate and the nominal foreign interest rate.