Relationship between changes in the budget deficit and the movement on the exchange rate in the ASEAN-5 countries: A panel data approach

• Main Authors: Alaba, Jean Nicole Uy, Perez, Marie Angeli Magno, Tan, Lorraine Tio
• Format: text
• Language: English
• Published: Animo Repository 2008
• Subjects: Foreign exchange rates; Budget deficits; Foreign exchange market.; Economics
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/11452
• Institution: De La Salle University

The currency value of a country is constantly being managed and evaluated by a pool of intellectual economic and financial experts simply because it carries with it much significance as it is being utilized as a basis for investments, capital lending, economic standing and potential trends. Thus, it is essential to assess its determinants in order for the tasked professionals to be equipped in manipulating the appropriate variables accordingly. This study aims to determine if the indirect effects of the changes in the ASEAN-5 budget deficit are more dominant than its direct effect in influencing movements on their corresponding exchange rate. To attain the stated objective, the gathered data for the ASEAN-5, namely, Indonesia, Malaysia, Philippines, Singapore and Thailand were regressed upon the basis of a Seemingly Unrelated Regression model. The indirect effects were evaluated through changes brought about by the expected inflation, risk premium and expected rate of return effects as opposed to the straightforward aftermath of the budget deficit. The results of this study indicated that the indicted that the indirect effects were actually more dominant in affecting the movement on the exchange rate of the ASEAN 5. Therefore, contrary to the conventional macroeconomic theory that states otherwise, an increase (decrease) in the budget will cause the exchange rate to depreciate (appreciate).