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.