Structural Break in the Real Exchange Rates: The Asian Crisis

Abstract

This study estimates the break point in the residual variance and in the propagation mechanism of the real exchange rates at about the time of the Asian crisis that occurred in 1997, and provides some explanations for the breaks. The breaks in the residual variance increased the volatility of the real exchange rates, which given the overall effects of common adverse shocks to the countries seems to be reinforced by the sudden withdrawal of Japanese commercial banks' lending to the region. And the subsequent breaks in the propagation mechanism reduced the volatility, which reflects the change in the government policy stance to result in smoothing the pace of appreciation. In addition, the breaks in the nominal exchange rates rather than in the price ratios are mainly responsible for the breaks in the real exchange rates.

Keywords

• Crisis
• Structural Break
• Real Exchange Rate
• Residual Variance
• Propagation Mechanism
• Japanese Commercial Banks
• Reserve Accumulation