Ahmad Zubaidi Baharumshah

On the sustainability of current account deficits: evidence from four ASEAN countries

This paper examines the sustainability of the current account imbalance for four ASEAN countries (Indonesia, Malaysia, the Philippines and Thailand) over the 1961-1999 period. To this end, we utilize the intertemporal budget constraint (IBC) model to explain the behavior of the current account in these countries. The analysis is based on various unit root and cointegration procedures including those allowing for a structural break to deal with the major shortcomings of previous studies. The empirical results indicate clearly that for all countries, except Malaysia, current account deficits were not on the long-run steady state in the pre-crisis (1961-1997) era. This leads us to conclude that the current accounts of these countries were unsustainable and did not move towards external account equilibrium. Moreover, the persistent current account deficits might serve as a leading indicator of financial crises. In contrast, we find strong comovement between inflows and outflows in Indonesia, the Philippines and Thailand in the period including the post-crisis years, while Malaysia was on an unsustainable path. This is because macroeconomic performance of most of the ASEAN countries has changed dramatically since the onset of the Asian crisis in mid-1997. The evidence suggests that action to prevent large appreciations should have been taken prior to the 1997 crisis.

The Effect of Exchange Rate on Bilateral Trade Balance: New Evidence from Malaysia and Thailand

This paper attempts to identify the major economic factors that influence the bilateral trade balances of Malaysia and Thailand with the US and Japan. To this end, an unrestricted VAR model was estimated using quarterly frequency data from 1980: I to 1996: IV. The Johansen results indicate a stable long-run relation between trade and three macro variables: exchange rate, domestic income and foreign income. The main findings of this paper are: (i) the real effective exchange rate is an important variable in the trade balance equation and devaluation improves the trade balances of both economies in the long-run; (ii) the other important variables that determine trade balance include domestic and foreign incomes; (iii) the results indicate no J-curve effect and causal run from exchange rate to trade balance, (iv) the real effects of devaluation are distributed over a period of eight to nine quarters.

Does PPP hold between Asian and Japanese economies? Evidence using panel unit root and panel cointegration

This paper presents an empirical analysis of panel unit root and panel cointegration tests of long-run absolute purchasing power parity (PPP) for seven Asian developing economies (ADE). The evidence shows that the panel parametric and non-parametric tests either with a trend term or without a trend term support the hypothesis of cointegration between the bilateral exchange rates and relative prices against the selected foreign country — Japan.

Purchasing Power Parity in South East Asian Countries Economies: A Cointegration Approach

This paper presents findings from a study of the long-run purchasing power parity (PPP) conditions in five Asian economies. The cointegration tests using exchange rates and price indices from end-of-quarter observations over the last twenty years reject the PPP proposition for all countries. The absolute version of the PPP hypothesis is tested next by using lower frequency, that is, semi-annual and annual, data. In general these tests also failed to support the long-run PPP hypothesis. Further analysis using the Johansen-Juselius (1990) multivariate approach also failed to support the hypothesis.

Testing Twin Deficits Hypothesis using VARs and Variance Decomposition

ABSTRACT This paper examines the twin deficits hypothesis in the ASEAN countries. The major findings of this paper are the following. (1) Long run relationships are detected between budget and current account deficits. (2) The Keynesian view fits well for Thailand since the causality runs from budget deficit to current account deficit. For Indonesia, the causality runs in an opposite direction while the empirical results indicate that a bidirectional pattern of causality exists for Malaysia and the Philippines. (3) We also found support for an indirect causal relationship that runs from budget deficit to higher interest rates, and higher interest rates leading to the appreciation of the exchange rate, which in turn leads with the widening of the current account deficit. The results of the variance decompositions and impulse response functions suggest that the consequences of large budget and current account deficits become noticeable only over the long run.

Saving dynamics in the Asian countries

Abstract This paper investigates empirically the factors that have influenced the savings behavior in the fast growing Asian economies—Singapore, South Korea, Malaysia, Thailand and the Philippines. Both the short and long-run movements of savings are modeled during the 1960–1997. The empirical results of the analysis based on time series data may be summarized as follows: (i) foreign savings deters domestic saving both in the short and long run; (ii) savings does not Granger cause economic growth, except for Singapore; (iii) the effect of interest rate on saving in Asian countries is inconclusive and it reflects the extent of financial liberalization adopted in these countries; and (iv) in the long run the causality runs from foreign to domestic savings.

East Asian Real Exchange Rates and PPP: New Evidence from Panel-data Tests

Abstract This paper empirically tests purchasing power parity (PPP) using panel unit root designed for heterogeneous panels. Monthly data of six East Asian countries (South Korea, Thailand, Indonesia, Malaysia, Singapore and the Philippines) were used to test the long-run PPP relationship. This study documents the fact that unlike the pre-crises period, mean reversion in real Asian exchange rates is a feature of the post-crises period in all six countries considered in this study. It turns out that the results found in this study based on an array of panel unit root tests appears to be invariant to the choice of the numeraire currency, namely the US and Japanese yen.

DYNAMIC LINKAGES OF ASIAN STOCK MARKETS

This study examines the dynamic interrelationship among the major stock markets and in the four Asian markets (Malaysia, Thailand, Taiwan and South Korea), both in the short run and in the long run. To investigate the impact of financial reforms and the Asian financial crisis on these markets, we split the sample into three sub-periods: pre-liberalization (1988-91), post-liberalization (1992-96) and post-crisis (1997-99) periods. The empirical results suggest that all the Asian markets are closely linked with each other and with the world capital markets, namely those of the US and Japan, over the post-liberalization era. Overall, the evidence shows that the degree of integration between the Asian emerging markets and the US increased following the deregulation period, and that the relationship has intensified since the onset of the Asian crisis. There is no evidence to show that Japan has overtaken the US in dominating the Asian equity markets. In addition, our results show that the interrelationship among the Asian national markets has been affected by the crisis. Specifically, the crisis-affected countries of Malaysia and Thailand are increasingly interrelated with South Korea and Taiwan in the post-crash period.

Re-examining purchasing power parity for East-Asian currencies: 1976-2002

We investigate the behaviour of real exchange rates of six East-Asian countries in relation to their two major trading partners–the United States and Japan. These countries, except, Singapore were affected by the financial crisis of the fall 1997. Using monthly frequency data from 1976 to 2002 and the autoregressive distributed lag (ARDL) cointegration procedure we test for the long-run purchasing power parity (PPP) hypothesis. We find no evidence for the weak form of PPP in the pre-crisis period, but strong evidence in the post-crisis period. For the post-crisis period, we also find very small persistence of PPP deviations as indicated by very small half-lives (<7 months) and narrow confidence intervals with an upper bound of 1 year or less in most countries. Our findings reveal that the East Asian countries are returning to some form of PPP-oriented rule as a basis for their exchange rate policies.

The stock market and the ringgit exchange rate: a note

Abstract This paper presents and tests an augmented monetary model that includes the effect of stock prices on the bilateral exchange rates. The model is applied to the ringgit/US dollar (RM/US) and ringgit/Japanese yen (RM/JY) exchange rates. The empirical analysis is conducted by the Johansen method of cointegration. Using the data from the recent float that ends with 1996:Q4, the study is motivated, among others, by an interesting preliminary finding that although the augmented monetary model is cointegrated, it is subject to parameter instability and that the parameter time dependency can be attributed at least partly to a particular subset of the variables in the system including stock prices. We find that a restricted VAR model which imposes exogeneity restrictions on I(1) variables, such as stock prices, among others, exhibits both cointegration and parameter stability. In addition, we demonstrate that exchange rate adjusts to clear any disequilibrium in the long-run relationship. The empirical findings tend to suggest that the equity market is significant in affecting the exchange rate and in explaining at least in part the parameter instability evidenced in the cointegrating system. Hence, we conclude that models of equilibrium exchange rate should be extended to include equity markets in addition to bond markets.