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# European Journal of Economics, Finance And Administrative Sciences - Issue 18 (2010)

2. Data and Methodology This research is carried out using secondary annual data from ASEAN+3, EU and North America in the period of 1991 to 2005. Due to the completeness of the data, we include only these selected countries in our analysis, they are:

# Asian Region

:

Indonesia, Malaysia, Singapura, Thailand, the Phillipines, Japan, China and South Korea

Non-Asia Region : United Kongdom, France, Germany, the Netherland, Belgium,Danemark, Sweden, Norway, The USA, Canada and Mexico. The data ontained from the International Financial Statistic (IFS), World Economic Statistic and Bloomberg. Calculation process was done using statistical package SPSS 13.0, Minitab 14 and Evies 5.1.

At the beginning, we use the exploratory data analysis to study the behavior of the data in a simple way, especially to see the graphical comovement between inflation and the exchange rates. We will then the employ the Granger-causality test to explore the direction of the relationships between the two variables. In the final step, we will use the panel data model to see whether there are difference between Asia, the EU and Noth America.

In this paper, we adopt the model of Kamin and Klau (2003), and the inflation can be formulated as follows (all variables are in narural logarithms):

## Δpt = −αλψ + λ rert −1 + αλε (qH − qH )t −1 + (1 − α )Δp*t + (1 − α )Δet + βΔpt −1

where:

rert-1 (qH qH ) t-1

= lag of real exchange rates (increase of rert-1 means depreciation) = lag of output gap

p*t e p t t-1

= foreign inflation = the changes of domestic currency (against US\$) = lag of domestic inflation.

The output gap is calculating using Hodrick-Prescott (HP) Filter using this formula:

### T −1

Min

( yt st )2 + λ

t=0

t=2

((st+1

st ) (st st1 ))2

where

is the level of smoothness of the trend, s is trend of output and y is actual output. The process

of calculation is carried out using the software Eviews 5.1, where the trend of real GDP is assumed to

be potential GDP.

3. Estimation Results In this section, we will present the results of the descriptive statistics, the granger causality test and the panel data as well. Moreover, the scientific explanation of the resulrs will also be provided.

# 3.1. Explorative Data Analysis

The exploratory data analysis shows the behaviour of inflation and real exchange rates in Asia. The Apendix 1 presents the time series plot of real exchange rates and inflation in eight Asian countries. From the figure, it seems to be clear that there is a correlation between the inflation and real exchange rate movements, with exception for Malaysia. After the crisis Malaysia practices fixed exchange rates regime, so that the exchange rates of Malaysian Ringgit becomes more stable or even constant. The depreciation of exchange rates is therefore in line with higher inflation.

Moreover, we can see that there may be different behavior of the exchange rates and inflation in all countries before and after the Asian financial crisis 1997. The two variables (inflation and exchange rates) seem to be more volatile following the crisis,

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