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 show that the responses to currency shocks under different regimes differ in terms of size and persistence. Among three currencies used in this study, Indonesian rupiah has been found most sensitive to regime shifts. On the other hand, leading role of Thai baht in affecting regional currency fluctuations has been confirmed.