The Real Effective Exchange Rate Impact on ASEAN-5 Economic Growth

Abdalrahman Abudalu

doi:10.4172/2162-6359.1000174

Abstract

This is an empirical analysis study focuses simultaneously on the impact of the real effective exchange rate, domestic interest rate, foreign interest rate, inflation rate, domestic money supply, net foreign assets and terms of trade which were identified by earlier researchers upon real growth domestic products (RGDP) of the ASEAN-5 countries. The real effective exchange rates (REER) of these currencies are measured against the US Dollar based on authoritative quarterly data time series between 1991:Q1 to 2006:Q2. This study is expected to provide several important economic and financial contributions to fill the gap in the financial and economic literature for ASEAN countries. It identifies the measure of the impact of the real effective exchange rates (REER) upon their economic growth using the most advanced statistical frameworks. A recently developed “Autoregressive Distributed Lag (ARDL)” co-integration by Pesaran et al. was the fundamental approach employed to analyse the relevant hypotheses of this study. The ARDL technique indeed was recognized to have additional advantages of yielding consistent estimates of the long-run coefficient. The empirical results confirm that the domestic money supply (M1) followed by REER (S) are the long-term and short- run variables that had positive and significant impact on ASEAN-5 countries’ real domestic products’ growth rate (RGDP). The other identified variables by the earlier researchers had diverse impacts during the full study period, their impact on economic growth of the study countries over the period vary in accordance to the contemporary businesses and economics environments.

Highlights

The 1997 Asian Financial crisis (AFC) plunged some of the most successful emerging economies in the world, Thailand, Malaysia, Indonesia, Philippines and Singapore, into acute financial chaos
The results indicated that the real exchange rate was highly correlated with the intensity of economic growth which dropped during periods with currency crisis; they found that there was a direct relation between the GDP and RER
The results showed that high foreign interest rates have a contractionary effect on annual real GDP growth in the domestic economy, but that effect is centered on countries with fixed exchange rates

Summary

Introduction

The 1997 Asian Financial crisis (AFC) plunged some of the most successful emerging economies in the world, Thailand, Malaysia, Indonesia, Philippines and Singapore, into acute financial chaos. It is worth mentioning that the ASEAN-5 have growth experiences that are sufficiently different from each other in terms of timing, resource dependence and industrial structure they may have shared the common “growth miracle” [2,3]. It was empirically and theoretically argued that the AFC caused the ASEAN-5 economies to become more sensitive to change and fluctuations in the world economy – the economy of the USA. The issue of the degree of sensitivity of the ASEAN-5 economies to the USA would be measured in this study. The findings of this study should be useful for the ASEAN-5 policymakers. In the light of the serious implication of the changes and fluctuations of exchange rates in ASEAN-5 economics, it is critically important to conduct a study on the ASEAN-5 REER determinants that it has many important impacts on their economic growth

Methods

Results

Conclusion