ANNALS OF ECONOMICS AND FINANCE 4, 375–400 (2003) Sources of Exchange Rate Fluctuations: The Cases of Mexico and Thailand in the Aftermaths of their Recent Currency Crises*

We construct a sticky-price open macro model in the spirit of Clarida and Gali (1994), and use it to motivate a structural VAR analysis of the real and nominal exchange rates for Mexico and Thailand in the aftermaths of their currency crises in 1994 and 1997. We identify the model’s structural shocks to demand, supply, money, and capital flow using the long-run restriction method pioneered by Blanchard and Quah (1989). Our structural estimates suggest that demand shocks explain a bulk of the variance in real and nominal exchange rate fluctuations, supply and money shocks explain more for Mexico than for Thailand, and transitory shocks to capital flow explain nearly 10 percent for Thailand but virtually none for Mexico. To the extent that transitory shocks to capital flow may reflect shifts in investor sentiment about near-term country risk, our results suggest that exchange rate volatility during a post-crisis period may in part be attributable to variations in country-risk premia in the case o