Empirical Study of Scapegoat Theory Paradigm in the Exchange Rate Variable in the ASEAN 5

ABSTRACT

This paper attempts to explain empirically the effect of order flow as an unobserved variable on the exchange rate movements based on the theory of scapegoat. The theory of scapegoat appears as the answer to the imbalance in the relationship between macroeconomic fundamentals and the exchange rate. To analyze the validity of this theory in Indonesia, the Philippines, Malaysia, Singapore, and Thailand (ASEAN 5), we apply the two-stage least squares method. The empirical testing generates a fact that the paradigm of scapegoat theory works for four countries, namely Indonesia, Malaysia, Singapore, and Thailand. Another finding is that the theory of scapegoat does not work for the Philippines. The implication of policy based on the results is the emphasis of policy that enables intervention in the foreign exchange market, the enhancement of monetary policy transparency in each country, as well as the management of capital flows more efficiently.

KEYWORDS:

• Theory of scapegoat
• order flow
• exchange rate
• macroeconomic fundamentals
• exchange fundamentals
• Two-stage least squares

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 The original data retrieved from Bank Indonesia, Bank Negara Malaysia (BNM), Bank of Thailand (BOT), Bangko Sentral ng Pilipinas (BSP), Monetary Authority of Singapore (MAS), and International Finance Statistic from IMF. Money supply ratio of GDP that used int this paper is M2 ratio of GDP.

Additional information

Notes on contributors

Adhitya Wardhono

Adhitya Wardhono is a lecturer and researcher at the Department of Economics and Development Studies, Faculty of Economics and Business, University of Jember. He has specialized in Monetary Economics, Econometrics, and Banking.

Dwi Arisandi

Dwi Arisandi is a graduate student from the Department of Economics and Development Studies, Faculty of Economics and Business, University of Jember.

M. Abd. Nasir

M. Abd. Nasir is a young lecturer and researcher at the Department of Economics and Development Studies, Faculty of Economics and Business, Universitas Jember. He has specialized in International Monetary Economics and Microeconomics.