Revisiting East Asian exchange rates: the same spirit under a different sky

Abstract

The transmission of shocks among East Asian currencies following the 1997 crisis has been a widely investigated topic using different methodologies. Some studies have utilized linear vector autoregression (VAR) and its tools, such as impulse responses and forecast error variance decompositions. A few on the other hand, focusing on the nonlinearities in exchange rates, employed Markov-switching VAR (MS-VAR) framework, thus attempted to capture asymmetries linked with different regimes. A major problem of typical MS-VAR models, however, lies in the lack of economic intuition unless these are converted into a structurally identifiable form. This article extends such studies by using a different apparatus: first, it combines Markov switching and structural identifying restrictions in a vector autoregression (MS-VAR) framework, thus providing regime-dependent impulse response functions to currency shocks. Second, it also provides impulse responses to shocks associated with regime changes. Empirical findings sh...