The Determinants of Exchange Rate on ASEAN-5 Countries: An Evidence of Purchasing Power Parity

Abstract

This paper presents the empirical study on long-run and short-run forcing variables of purchasing power parity (PPP) for ASEAN-5 currencies vis-a-vis the U.S. dollar, i.e., their real effective exchange rate (REER). This study uses a recently developed autoregressive distributed lag (ARDL) approach to co-integration (Pesaran et al., 2001) over the period 1991:Q1 - 2006:Q2. Our empirical results suggest that the domestic money supply (M1) for Malaysia is in the long-run only, while for Indonesia, Philippines, and Singapore are in the long and short run is a significant long run forcing variable of PPP for countries' REER. However, the results suggested that, the domestic interest rate (R) is a long run and short run forcing variable of PPP for Malaysia, Philippines, Singapore and Thailand REERs. The findings can derive policy implication for the monetary authorities in these ASEAN-5 countries.