14 where AlnYt, AlnEt and AlnPt are, respectively, the growth rate of relative real GDP, the rate of change in the real effective exchange rate, and the rate of relative inflation (measured in terms of GDP deflators); xt is an unspecified set of exogenous variables affecting the VAR system; and u, v and w are, respectively, macroeconomic fundamental shocks to relative real GDP, the real effective exchange rate and relative inflation. Here, relative real GDP is defined as the country's real GDP relative to real world GDP and the rate of relative inflation is defined as the rate of change in the country's GDP deflator relative to the world GDP deflator, where the relevant world variables are given by the weighted average of the US (with the weight of 0.4), Japanese _(0.3)_ and EU (0.3) variables; the EU variables are in turn given by the weighted averages of the relevant variables for its members, with the GDP shares in 1990. The real effective exchange rate is defined as the country's weighted exchange rates vis-a-vis the US dollar (with the weight of 0.4), the Japanese yen (0.3) and the ECU (0.3), using GDP deflators as the price variables.

Following the procedures suggested by Blanchard and Quah (1989) and Clarida and Gali (1994), we identify the underlying shocks by estimating the structural VAR model, which can be obtained by converting the above MA processes, under the restrictions that the sums of the coefficients *2j, +3j and X3j are respectively zero, that is, Z4 2 j =0, Z43j=0 and ZX3j=0. These restrictions reflect the conditions that (a) the real output shock ut affects all the variables in the long run; (b) the real exchange rate shock vt affects both the real exchange rate and price inflation, but not real output, in the long run; and (c) the nominal shock wt affects only the rate of inflation in the long run (Clarida and Gali 1994). In view of the preliminary information based on AIC and other criteria (Kawai and Okumura 1996), lag length is set at one. For xt, we use the real oil prices, which are given by the US dollar prices of oil adjusted for the US producer price index. Data frequency is annual and the sample period is 1970-98 (1979-98 for China).

# 2. **Impulse Response Analyses**

The above model can be used to analyze the patterns of impulse response of relative real GDP growth (simply real GDP hereafter) and relative price inflation (simply the price hereafter) when there is a shock in the rate of change in real effective exchange rates (simply the real effective exchange rate hereafter). In what follows, we will use the impulse responses of the two key macroeconomic variables as a way of assessing the impact of fluctuations in major currency exchange rates on the East Asian economies, namely, China, Hong Kong SAR, Indonesia, Korea, Malaysia, the Philippines, Singapore, Taiwan POC and Thailand.

Panels in Figure 2 depict, for the respective economies, the impulse responses of real GDP and the price to a one-standard deviation shock to the real effective exchange rate; they also show how the real effective exchange rate itself will respond over time. It appears that the initial responses of real GDP and prices are asymmetric between the crisis and non-crisis countries. First, in response to a unit depreciation of the real effective exchange rate, real GDP initially increases in the non-crisis countries, namely, China, Hong Kong SAR, Singapore and Taiwan POC. In contrast, real GDP initially declines in most of the crisis countries, namely, Indonesia, Korea, the Philippines and Thailand; in Malaysia, output remains virtually unchanged. These asymmetric responses between the crisis and non-crisis countries may reflect the impact of the currency crisis of 1997-98, where a sharp fall in output was associated with a sharp currency depreciation.