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Evolution of Output Multipliers: An Analysis with a Particular Emphasis on Asia *1

September 2004
Shinsuke Ohyama *2

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  • *1 A preliminary version of this paper was presented at the European Central Bank Workshop, "the Importance of the External Dimension for the Euro Area: Trade, Capital Flows, and International Macroeconomic Linkages," held on March 29-30, 2004. I would like to thank Lawrence Schembri (Bank of Canada) and other workshop participants for their valuable comments and suggestions. I also would like to extend thanks to Akinari Horii, Ryo Kato, Hitoshi Mio, Akira Otani, Toshitaka Sekine, and many other officials of the Bank of Japan. I would like to thank Tomoko Mori for her insightful research assistance. Any remaining errors my own. The views expressed here are solely those of the author and not necessarily those of the Bank of Japan.
  • *2 International Department, Bank of Japan. 2-1-1 Nihonbashi-Hongokucho, Chuo-ku, Tokyo, Japan, 103-8660. E-mail: shinsuke.ooyama@boj.or.jp.

Abstract

A shock to one country affects output growth in other countries not only through bilateral trade channels but also via output fluctuations in third countries. This paper attempts to quantify the impact of external shocks on growth rates and show how it has evolved over time. In order to capture a shock's international transmission mechanism, a structural VAR model is constructed in which cross-country trade relations influence output growth in major countries. Abeysinghe and Forbes [2001] first introduced such a model and this paper attempts to extend the model by incorporating the influence of changes in trade openness and country specific input-good prices. A series of impulse response analyses indicate an important transmission channel across countries, namely the output-multiplier effect, that has been overlooked in models using only bilateral trade relationships. This paper also contends that output multipliers have changed over time, reflecting an increasing interdependency of the global economy as well as expanding influences of autonomous growth in the Chinese and the U.S. economies.