ALEXANDER W. HOFFMAISTER JORGE E. ROLDOS International Monetary Fund Washington, D. C. The Sources of Macroeconomic Fluctuations in Developing Countries: Brazil and Korea* This paper studies the sources of macroeconomic fluctuations in small open economies using a structural VAR approach. The identification of the structural shocks is based primarily on long- run restrictions that are in the spirit of Blanehard and Quail (1989). The evidence from Brazil and Korea suggests that domestic shocks are the main source of GDP fluctuations, while external shocks explain a small fraction of movements in output. In Korea, the most important domestic shocks are those associated with supply factors. In Brazil, domestic demand factors are impor- tant but the high level of maeroeconomic instability casts some doubts on the appropriateness of some of the identifying assumptions. 1. Introduction One of the most basic propositions in maeroeconomics is that output fluctuations can be due to demand or to supply shocks, that is, fiscal or monetary policies on one hand, or productivity, labor supply, or structural reforms on the other. While the strict dichotomy of demand and supply has been questioned by Buiter (1987) and Plosser (1990) it is still useful to understand the nature of output fluctuations and can help to shed light on which types of models appear to explain better the evolution of output. In this regard, several studies have exploited this dichotomy in the context of closed economies to provide empirical evidence on the relative importance of demand versus supply shocks in explaining output fluctuations, and of nominal versus real shocks in the generation and propagation of business cycles, notably Blanchard and Quah (1989), Shapiro and Watson (1988) and King, Stock and Watson (1991). Recently, this framework has been extended to large open economies to study the relative transmission properties of fixed versus floating exchange rates, by amongst others Ahmed et al. (1993), and *The views expressed in this study are our own and do not necessarily represent those of the IMF. We are grateful to Richard Ag6nor, Paul Cashin, David Coe, Alexandre Kafka, Se-Jik Kim, Don Mathieson, Gian-Maria Milesi Ferreti, Hello Mora, Pierre Siklos, and two anonymous referees for their comments, and to Toh Kuan for research assistance. We are responsible for remaining errors. Journal of Macroeconomics, Winter 2001, Vol. 23, No. 1, pp. 213-239 Copyright © 2001 by Louisiana State University Press 0164-0704/2001/$1.50 213