The Role of Non-Parity Fundamentals in Exchange Rate Determination: Australia and the Asia Pacific Region
This paper extends the literature by looking at the contribution of non-parity variables after extracting the impact of parity variables on exchange rates of Australia and the Asia Pacific countries. Exchange rates are examined using high- and low-frequency multi-country panel time series data for a group of trade-related nations in the Asia Pacific, including Japan. Our findings suggest that exchange rate is affected by growth rate, and trade and capital flows: other less significant variables include sovereign debt; balance of payments; money supply; and trade openness. It also confirms that interest rate has significant effect on exchange rates while price effect is not significant in short run regressions. These key findings are robust across different time intervals, thus showing new findings on the exchange rate dynamics consistent with theories.