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

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.