An empirical analysis of Malaysian ringgit equilibrium exchange rate and misalignment
Following the reinstatement to managed floating exchange rate regime in July 2005, the real effective exchange rate (REER) of Malaysian ringgit (RM) has been fluctuating, albeit, slightly, which raises the question whether the current trend is consistent with the economic fundamentals. This paper...
| Main Authors: | , |
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| Format: | Article |
| Language: | English |
| Published: |
World Business Institute, Australia
2009
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/549/ http://irep.iium.edu.my/549/ http://irep.iium.edu.my/549/1/An_empirical_analysis_of_Malaysian_ringgit_equilibrium_exchange_rate_and_misalignment.pdf |
| Summary: | Following the reinstatement to managed floating exchange
rate regime in July 2005, the real effective exchange rate
(REER) of Malaysian ringgit (RM) has been fluctuating,
albeit, slightly, which raises the question whether the current trend is consistent with the economic fundamentals. This paper attempts to ascertain the degree of misalignment of the ringgit by estimating the long run equilibrium real
effective exchange rate of the currency. Based on Johansen
vector cointegration technique, we have identified productivity, government consumption expenditure, and
trade openness as important determinants of the ringgit long
run equilibrium value. Results suggest that the ringgit was
persistently overvalued prior to the 1997 crisis. After the
crisis, the ringgit fluctuates around its long run equilibrium and the misalignments are eliminated over a relatively short period. |
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