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FORCING VARIABLES OF PURCHASING POWER PARITY ON ASEAN-4 REAL EFFECTIVE EXCHANGE RATE: AN APPLICATION OF AUTOREGRESSIVE DISTRIBUTED LAG (ARDL)

Che Ani Mad, Angappan Regupathi, Abdalrahman AbuDalu

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Abstract

This paper presents the empirical study on long-run and short-run forcing variables of purchasing power parity (PPP) for ASEAN-4 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 long-run only, while for Indonesia, Philippines, and Singapore are in long and short run is a significant forcing variable of PPP for countries’ REER. The findings can derive policy implication for the monetary authorities in these ASEAN-4 countries.

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What this paper is about

This paper presents the empirical study on long-run and short-run forcing variables of purchasing power parity (PPP) for ASEAN-4 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 long-run only, while for Indonesia, Philippines, and Singapore are in long and short run is a significant forcing variable of PPP for countries’ REER. The findings can derive policy implication for the monetary authorities in these ASEAN-4 countries.

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Available abstract

This paper presents the empirical study on long-run and short-run forcing variables of purchasing power parity (PPP) for ASEAN-4 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 long-run only, while for Indonesia, Philippines, and Singapore are in long and short run is a significant forcing variable of PPP for countries’ REER. The findings can derive policy implication for the monetary authorities in these ASEAN-4 countries.

Key concepts: Distributed lag, Purchasing power parity, Economics, Autoregressive model, Exchange rate, Econometrics, Short run, Monetary economics

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FORCING VARIABLES OF PURCHASING POWER PARITY ON ASEAN-4 REAL EFFECTIVE EXCHANGE RATE: AN APPLICATION OF AUTOREGRESSIVE DISTRIBUTED LAG (ARDL) — Research Paper | ScholarLens