117 Asian Journal of Business and Accounting, 1(2), 2008 Exchange Rate Equilibrium and Fundamentals in Asia-Pacific Countries Exchange Rate Equilibrium and Fundamentals in Asia-Pacific Countries Catherine S. F. Ho * and Mohamed Ariff A bstract This paper provides new findings that extend the literature by investigating the time to equilibrium for price changes to catch up with exchange rate and the contribution of non-parity fundamentals in exchange-rate dynamics in a trade-related multi-country framework. It reports new findings on exchange behaviour by expanding the parity variables to include other theory-suggested variables with high and low-frequency multi-country panel regression analysis, and Divisia Index Model. Our findings indicate that exchange rates are affected by growth rates, capital and balance- of-payment flows, fiscal, monetary and other fundamentals. This study also confirms that long-run PPP equilibrium for a group of Asia Pacific countries is five years. These key findings are robust across different time intervals. Keywords: Exchange Rates, Parity Theorems, Trade and Capital Flows, Foreign Debt and Reserves, Growth, Monetary and Fiscal Policy JEL classifications: F31, F32, G15 1. Introduction The role of capital and trade flows in exchange rate determination and the effects of traditional factors’ on exchange rates of small to medium-size economies are unexplored issues in international finance. Second, after much effort at studying bilateral exchange rate determination, which has yet provided consistent findings, new approach using multi-country framework and improved research design is needed to understand exchange rates. The motivation of this paper is to present findings on exchange rate behaviour by examining long run PPP with a newer approach as well as including new factors and other theory-suggested ones Asian Journal of Business and Accounting, 1(2), 2008, 117-146 ISSN 1985-4064 * Corresponding author. Catherine S.F. Ho is an Associate Professor of Finance, Faculty of Business Management, University Technology MARA, 40450 Shah Alam, Selangor, Malaysia, e-mail: catherine@salam.uitm.edu.my. Mohamed Ariff is Chair in Finance, Department of Finance, Bond University, Queensland 4229, Australia, e-mail: mariff@bond.edu.au.