The determinants of ASEAN-5 real effective exchange rate vis-á-vis the 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 currencies vis-à-vis the 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 (Pesaran et 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.

Citation

AbuDalu, A. and Musa Ahmed, E. (2014), "The determinants of ASEAN-5 real effective exchange rate vis-á-vis the UK pound", World Journal of Entrepreneurship, Management and Sustainable Development, Vol. 10 No. 2, pp. 98-118. https://doi.org/10.1108/WJEMSD-07-2013-0038