| Abstract
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The recent wave of financial crises in the 1990s and the 2000s resulted in severe economic distress among emerging market countries across several regions. The exchange rate plunged sharply at the time of crisis and output severely contracted. Using the quarterly data of the Asian-5 (Thailand, the Philippines, Malaysia, Indonesia, and South Korea) and two Latin American (Argentina and Mexico) countries, this paper is the first empirical study to investigate the impact of financial crises on output and exchange rates from the perspective of business cycle fluctuations. The main focus of this study is on how output and exchange rates behave during the post-crisis period compared to the pre-crisis period in these countries. More importantly, the source of the change in output and exchange rate variability from the pre-crisis toward the post-crisis period will be determined; whether it is due to the change in structure (propagation mechanism) or the change in shocks (impulses). Implementing the counterfactual VAR analysis, the evidence of exchange rate analysis shows that all countries but Malaysia and the Philippines experienced higher exchange rate variability after the crisis erupted. The results robustly indicate that the change in shocks rather than the change in structure is mainly accounted for these variability changes for all countries except Indonesia. For output analysis, Thailand, the Philippines, and Argentina exhibit lower post-crisis output variance while South Korea, Indonesia, Malaysia, and Mexico show higher post-crisis output variance. The main conclusion drawing from empirical evidence on what caused these changes for these countries suggests that, except for the Philippines, the change in structure rather than the change in shocks is mainly, if not entirely, responsible for the change in output variability. With the lower output variance that is mainly attributable to structural change, I conclude that Thailand and Argentina did learn a lesson from their recent financial crises through changing their structure in order to avoid future crises. Although the structural changes in the rest of the countries produced higher output variance, Mexico is a good example of how structural changes after the Mexican crisis in 1994–1995 helped the economy lean against the wind during the Asian and the Argentine economic crisis. The real tests for the rest of the countries remain to be seen.
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