Impact of International Financial Shocks on Small Open Economies: The Case of Four ASEAN Countries

Abstract

A more integrated global financial system has implications on the economic volatility of small open economies. This paper simulates the impact of a short term shock originating from the global financial system on small open economies in the Association of Southeast Asian Nations (ASEAN). The simulation is conducted by means of empirically estimated small open economy dynamic stochastic general equilibrium models for Indonesia, Malaysia, the Philippines, and Thailand. The analysis highlights similarities and differences of the impact of a pure international financial shock on aggregate domestic price inflation and on output gap for each of the four ASEAN countries. It suggests that the impact of such shock on the sampled economies tends to be relatively small but long lasting, hence placing challenges on the task of managing economic volatility in these economies.