The Korean Journal of Economic Studies
The Effect of Supply and Demand Shocks on Domestic Macroeconomy - Using a Latent Factor Model
Keun Yeong Lee(Sungkyunkwan University)Year 2011Vol. 59No. 4
Abstract
The paper first derives the three latent factors related to supply and demand shocks from asset prices and foreign exchange rates by using Pavlova and Rigobon’s(2007) model and then analyzes the effect of shocks to these factors on domestic macroeconomy by using a VAR model. It shows that positive supply shocks in Korea and the US raise both KOSPI and Dow Jones Index together. On the other hand, positive relative demand shocks increase KOSPI, but decrease Dow Jones Index. According to the impulse response analyses, exports, industrial production, and BSI are gone up by positive domestic and foreign supply shocks, but down by positive relative demand shocks. The impacts of these shocks on the consumer price index and the unemployment rate are in the opposite direction, but are statistically little significant.