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VAR modelling in the presence of China’s rise: an application to the Taiwanese economy

Mardi Dungey (), Tugrul Vehbi () and Charlton Martin

No 2014-09, Working Papers from University of Tasmania, Tasmanian School of Business and Economics

Abstract: This paper uses the impulse responses of a structural VECM to compare the effect of output shocks originating from the US and China on the Taiwanese economy. From 1980 to 2011 the impact of a US output shock on Taiwan is seven times greater than one originating in China, yet from 2000 to 2011 the impact from either country is the same. Exposure to China has grown more rapidly than exposure to the US, reflecting the rapid growth in cross-strait trade intensity between China and Taiwan this century. Other East Asian economies that have booming trade with China are likely to exhibit similar results, questioning the common practice of using the US as a proxy for foreign effects in the region. We provide two examples motivating the need to include both US and Chinese foreign effects in modelling Taiwan; one based on the evolving economic openness of Taiwan and the second from the East Asia monetary union literature.

Keywords: China; VECM; Taiwan (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cna
Date: 2014-07
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Published by the University of Tasmania. Discussion paper 2014-09

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