Exchange Rate Equilibrium and Fundamentals in Asia-Pacific Countries

Abstract

This paper provides new findings that extend the literature by
investigating the time to equilibrium for price changes to catch up
with exchange rate and the contribution of non-parity fundamentals
in exchange-rate dynamics in a trade-related multi-country
framework. It reports new findings on exchange behaviour by
expanding the parity variables to include other theory-suggested
variables with high and low-frequency multi-country panel
regression analysis, and Divisia Index Model. Our findings indicate
that exchange rates are affected by growth rates, capital and balanceof-
payment flows, fiscal, monetary and other fundamentals. This
study also confirms that long-run PPP equilibrium for a group of
Asia Pacific countries is five years. These key findings are robust
across different time intervals.
Keywords: Exchange Rates, Parity Theorems, Trade and Capital
Flows, Foreign Debt and Reserves, Growth, Monetary and Fiscal
Policy
JEL classifications: F31, F32, G15