Identifying aggregate supply and demand shocks in small open economies: Empirical evidence from African countries

Article history: Received 1 April 2010 Received in revised form 3 August 2011 Accepted 4 August 2011 Available online 11 August 2011 This paper uses a tri-variate structural VAR with a long-run identification scheme, akin to the Blanchard and Quah method, to identify external and domestic supply and demand shocks in 22 African countries between 1980 and 2005. Domestic supply shocks are found to be the most important factor contributing over 70% to output fluctuations in these countries, with external shocks playing a relatively minor role. A partial correlation analysis between the identified shocks and a measure of the fiscal policies of the countries revealed that the fiscal policies pursued by most of the countries during the period are counter-cyclical. © 2011 Elsevier Inc. All rights reserved. JEL Classification: E62 F41 F43