| Summary: | The misalignment of exchange rates among ASEAN, China, Japan and Korea
(henceforth Plus Three Countries) has been seriously debated over the past few
decades. In order to better understand the behaviour of exchange rates for ASEAN
Plus Three, this study focuses on three objectives. First, to examine the roles of
macroeconomics fundamentals on the real exchange rates; second, to evaluate the
misalignment of exchange rates; and third, to evaluate and determine the best model
to represent the exchange rates behaviour for these countries, using FEER, NATREX
and BEER models. This study uses exchange rates as the dependent variable. The
independent variables consist of productivity differences, net foreign assets,
government spending, terms of trade, openness, real interest differences, current
account, output gaps, total factor productivity, dependency ratio of the young, real
interest rate, and tax revenue and foreign direct investment. To achieve the goal,
Autoregressive Distributed Lag (ARDL) was used, along with the Hausman test based
on Dynamic Panel Data, and model evaluation based on forecasting techniques. The
results suggest that the macroeconomics fundamental variables have different impact
on the exchange rates. This study demonstrates the misalignment of exchange rates
using the residuals of estimation. It could imply that the currency would experience
undervaluation if the disequilibrium error has positive value, and overvaluation if the
disequilibrium error is negative. Next, the results from forecasting techniques based
on “out-of-sample predictions” and “forecast encompassing” suggest that FEER,
NATREX and BEER models are able to represent what is the best model for each
different country in this region. Finally, this study suggests that the policy makers
should take into account the macroeconomic indicators in order to explain exchange
rate movement and subsequently achieve economic goals. Besides, ASEAN Plus
Three countries should take into consideration the possibility of the formation of such
a currency union as the European Union (EU) countries. On thought of that, the Chinese yuan (or renminbi) or the Japanese yen could be the anchor currency due to
its have large currency coverage areas and more stable.
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