The determinants of ASEAN-5 real effective exchange ratevis-á-visthe UK pound

Abstract

Purpose– The purpose of this paper is to present an empirical analysis of long-run and short-run forcing variables of purchasing power parity (PPP) for ASEAN-5 currenciesvis-à-visthe UK pound, i.e. their real effective exchange rate (REER).Design/methodology/approach– This study uses a recently developed autoregressive distributed lag (ARDL) approach to co-integration (Pesaranet al., 2001) over the period 1991:Q1-2006:Q2. Our empirical results suggest that the foreign interest rate (R*) and domestic money supply (M1) are the significant long-run forcing variables of PPP for ASEAN-5 REERs for the three periods.Findings– In the short-run, the variables have different impacts during the sub-periods and full period for ASEAN-5 countries. The results suggest that the domestic money supply (M1) for Malaysia, domestic interest rate and foreign interest rate (R*) for Indonesia, domestic money supply (M1) and term of trades (TOT) for Philippines, foreign interest rate (R*) for Thailand, and foreign interest rate (R*) and net foreign assets (NFA) for Singapore, respectively, have the highest significant short-run forcing variable of PPP for countries REERs.Originality/value– In this respect, the outcomes can derive policy implication for the monetary authorities in these ASEAN-5 countries.