An ARDL Analysis Of The Exchange Rates Principal Determinants: ASEAN-5 Aligned with The Yen

This study examines an empirical analysis of long-run and short-run forcing variables of purchasing power parity (PPP) for ASEAN-5 currencies: Malaysian Ringgit, Indonesian Rupiah, the Philippines Peso, Thailand Bath, and Singapore Dollar, against the Japanese Yen, i.e., their real exchange rate (RER). 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 point out that the domestic money supply (M1) is the significant long run forcing variable of PPP for ASEAN-5 RER’s for the study periods. However, in the short- run the impact of variables have different impact during the sub-periods and full period for ASEAN-5 countries, the results suggest that the domestic money supply (M1) for Malaysia, Indonesia, Philippines ,and Singapore respectively, , have the highest significant short run forcing variable of PPP for countries RER’s. However, foreign interest rates followed by domestic money supply are the short-run forcing variables for Thailand’s RER. This may be due to the peculiarity of Thailand government’s management of the Asian Financial Crisis (AFC).