Did Output Recover from the Asian Crisis

This paper investigates the extent to which output has recovered from the Asian crisis. A regime-switching approach that introduces two state variables is used to decompose recessions in a set of six Asian countries into permanent and transi-tory components. While growth recovered fairly quickly after the crisis, there is evidence of permanent losses in the levels of output in all the countries studied. [JEL F39, F41, F42, F49, C32, G15] The Asian financial crisis of 1997 generated a plethora of research that analyzedthe causes of the crisis, but less attention has been paid to the aftermath. How long do crises last and to what extent does output recover? Although there is copi-ous evidence that a financial crisis induces a recession, the literature has not exam-ined whether a recession following a crisis permanently lowers the level of output. This paper analyzes whether the output reduction after the Asian crisis was a tem-porary deviation downward from the trend level that was eventually reversed as output reverted to trend (that is, the recession temporarily lowered the level of out-put) or, alternatively, the level of output shifted down permanently. The paper approaches the question using a regime-switching common factor model. Recessions are decomposed into permanent and temporary components in a multivariate framework by introducing different state variables that control recoveries and recessions for each of the two components. Asymmetric adjust-