Using a dynamic aggregate supply and aggregate demand model with imperfect capital mobility and structural VARs, we decompose inflation and output movements into those attributable to terms of trade, supply, balance-of-payments, fiscal, and monetary shocks. Empirical results show that terms of trade shocks have a significant negative effect on inflation in the short run. In the long run, monetary, and balance of payments shocks dominate while budget deficits play a limited role in the inflationary process. Demand shocks have limited effects on output movements; output is mostly driven by terms of trade and supply shocks. The results highlight the importance of a credible disinflation program and structural reform that restrain discretionary aggregate demand policies.
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Paper provided by EconWPA in its series Macroeconomics with number
0306001.
Length: 33 pages Date of creation: 04 Jun 2003 Date of revision: Handle: RePEc:wpa:wuwpma:0306001
Note: Type of Document - Acrobat Reader/PDF; prepared on PC; to print on any printer; pages: 33 ; figures: included Contact details of provider: Web page: http://129.3.20.41
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