ABDALRAHMAN ABUDALU,&NBSP;UNIVERSITI UTARA MALAYSIA (UUM) , MALAYSIA
ELSADIG MUSA AHMED, MULTIMEDIA UNIVERSITY, MALAYSIA
Purpose: This paper presents 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.
Keywords: Purchasing Power Parity (PPP), Real Effective Exchange Rate, ASEAN-5