Abstract
In this study, we examined whether the exchange rates in ASEAN-5 countries are driven by monetary fundamentals. We applied the panel unit root tests and found that the United States denominated nominal exchange rates of Malaysian Ringgit, Indonesian Rupiah, Philippines Peso, Singapore Dollar, and Thailand Baht are all integrated of order one. Meanwhile, relative money supply and relative real income are also integrated in the same order. Nonetheless, the relative interest rate is integrated in order zero, and it implies the uncovered interest rate parity held in ASEAN-5. By using a panel cointegration test pioneered by Pedroni (2000, 2004), we found evidence that there is a long-run relationship between nominal exchange rate and its monetary fundamentals. Consistent with the monetary model of the exchange rate, relative money supply is positively related to nominal exchange rates, while relative real income is negatively related to nominal exchange rates. Therefore, this study reveals the importance of relative real money supply and relative income for the exchange rate market players to predict and monitor ASEAN-5 exchange rates.
Highlights
Introduction and OverviewExchange rate determination has been a focus of research interest for decades, after the collapse of the Bretton Woods system of fixed exchange rate in the early 1970s
We have attempted to examine whether monetary fundamentals could explain the Association of South-East-Asian Nations (ASEAN)-5 exchange rates behavior over the 2000 quarter one to 2014 quarter four periods
We would like to know whether monetary model does hold for ASEAN-5 countries
Summary
Introduction and OverviewExchange rate determination has been a focus of research interest for decades, after the collapse of the Bretton Woods system of fixed exchange rate in the early 1970s. With the right tools to predict the exchange rate behavior, it would help in enhancing the economic development of a country. Rapach and Wohar (2002) were able to provide evidence to support monetary model for half of the industrialized-countries under investigation using data that spanned over a century. There is another strand of research that utilizes nonlinear techniques to improve the power of tests over the conventional test procedures (see for instance Liew, 2004; Liew et al, 2004; Liew, 2008)
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