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E3 Journal of Business Management and Economics

E3 Journal of Business Management and Economics Vol. 4 (3) pp. 066-081, March 2013; © E3 Journals; ISSN 2141-7482

The long and short run forcing variables of purchasing power parity of ASEAN-5

Abdalrahman AbuDalu1 , Elsadig Musa Ahmed2 *
1 College of Business, Universiti Utara Malaysia, Kedah, Malaysia
2 Faculty of Business, Multimedia University
*Corresponding Author E-mail: elsadigmusa@yahoo.com
Accepted 27 January 2013

Abstract

This study examines the 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 the autoregressive distributed lag (ARDL) approach to co-integration over the period 1991:Q1 – 2006:Q2. Our empirical results suggest that the domestic money supply (M1) is a significant long run forcing variable for the REERs of Malaysia, Indonesia, the Philippines, and Singapore. However, the results suggest that the foreign interest rate (R*) is a long run forcing variable for Thailand’s REER. The findings can derive policy implication for the monetary authorities in these ASEAN-5 countries.

Keywords: Purchasing Power Parity (PPP), Real Effective Exchange Rate (REER), ASEAN-5, ARD

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