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Should Malaysia depreciate her exchange rate ?

Author

Listed:
  • Ghazali, Ummu
  • Masih, Mansur

Abstract

There is a wide discussion as to whether Malaysia should depreciate its exchange rate or not and the economists have different points of view because it might have either a good or bad impact on the Malaysian economy. Hence, the purpose of this study is to investigate the relationship between exchange rate, capital flows and inflation in order to test the effect of Malaysian exchange rate depreciation on the economy. This study employs standard time series techniques such as cointegration test, LRSM, VECM, VDC . The analysis tends to indicate that exchange rate, capital flows and inflation rate do move together as evidenced by their cointegration and that the exchange rate is determined exogenously as evidenced in the Generalized Variance Decomposition (VDC) tests. In other words, the Malaysian exchange rate leads (rather than follows) inflation and capital flows. The results are plausible and intuitive and have strong policy implications for the policy makers of an emerging economy like Malaysia.

Suggested Citation

  • Ghazali, Ummu & Masih, Mansur, 2018. "Should Malaysia depreciate her exchange rate ?," MPRA Paper 108481, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108481
    as

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    References listed on IDEAS

    as
    1. Combes, Jean-Louis & Kinda, Tidiane & Plane, Patrick, 2012. "Capital flows, exchange rate flexibility, and the real exchange rate," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1034-1043.
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    5. Ibarra, Carlos A., 2011. "Capital Flows and Real Exchange Rate Appreciation in Mexico," World Development, Elsevier, vol. 39(12), pages 2080-2090.
    6. Jiang, Jiadan & Kim, David, 2013. "Exchange rate pass-through to inflation in China," Economic Modelling, Elsevier, vol. 33(C), pages 900-912.
    7. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1993. "Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," IMF Staff Papers, Palgrave Macmillan, vol. 40(1), pages 108-151, March.
    8. Prema‐Chandra Athukorala & Sarath Rajapatirana, 2003. "Capital Inflows and the Real Exchange Rate: A Comparative Study of Asia and Latin America," The World Economy, Wiley Blackwell, vol. 26(4), pages 613-637, April.
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    More about this item

    Keywords

    currency depreciation; macro economic variables; VECM; VDC; Malaysia;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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