Government Spending and Exchange Rate in ASEAN Countries: Evidence from ARDL and Toda &Yamamoto Approach

Abstract

This paper examines the relationship between government spending and exchange rate in the ASEAN countries over the period 1986 to 2016. The article employs an autoregressive distributed lag (ARDL) model to capture the existence of level relationship between the variables and applies a modified version of Toda & Yamamoto Granger causality to fit a standard vector autoregressive model and circumvent some flaws deriving from the traditional causality. Results found the presence of long run relationship (co-integration) between government spending and exchange rate in Vietnam, Philippine, Malaysia, Indonesia and Cambodia, while the rest of countries found no evidence of long run relationship. The results of Toda & Yamamoto causality indicated a bidirectional causality between government spending and exchange rate for Thailand, whereas there exists a unidirectional causality running from exchange rate to government spending for Vietnam and Philippine, from government spending to exchange rate for Cambodia. However, results confirmed the absence of causality between variables for the remaining countries. More importantly, results are crucial for policy implications in the ASEAN countries Keywords: ASEAN, Government Spending, Exchange Rate, ARDL, Toda & Yamamoto Causality DOI: 10.7176/RJFA/14-10-09 Publication date: May 31 st 2023