This paper aims to estimate equilibrium exchange rates and identify the determinants of macroeconomics fundamentals affecting exchange rates in Malaysia. By using Natural Real Exchange Rates (NATREX) model, this study adopts the Autoregressive Distributed (ARDL) model to examine the long run relationships (or cointegration) among variables and the dynamic effect within variables in the short run for the period 1970 to 2012.suggest that the terms of trade, dependency ratio of the young, and play an important role in influencing the exchange rates movement in also reveals that the misalignment of exchange rates is quite small and stable in Malaysia
The study of exchange rate behavior is important to identify the currency either experiencing an overvaluation or undervaluation. The traditional theory to estimate exchange rates behavior is the Law of One Price (henceforth LOP). This theory suggests that the price levels would be the same between two countries after converting their price into a common currency. However, the LOP does not take into account the real macroeconomic fundamentals factors. Hence, this model is seen missing to explain the possible a particular exchange rate is influenced by macroeconomics fundamentals. Therefore, this study is aim to investigates the behavior of exchange rate movement and identify the determinants of macroeconomics fundamentals on the exchange rates in Malaysia. By using fundamental equilibrium exchange rates (FEER) model, this study adopts the bound testing popularized by Pesaran et al., and autoregressive distributed lag (ARDL) to examine the long run relationships (or cointegration) among the variables and the dynamic effect within variables in the short run.
As a small, open economy and newly industrialised country, Malaysia is also experiencing misalignment in its currency exchange. Hence, the aims of this paper is to investigate the exchange rate movement using BEER model. This paper adopts the bound testing and autoregressive distributed lag (ARDL) to examine the cointegration among variables for the period of 1970 to 2012. The results suggest that productivity differential, net foreign assets, terms of trade and trade liberalization play important roles in influencing exchange rate movement in Malaysia. The results also show that a misalignment of exchange rate is at a small percentage and stable. Besides that, the predictive power of BEER model shows a small root mean square error, thus revealing that the model is likely fit the data very close throughout the period and tracks the actual exchange rate to get a considerable number of turning points correct.
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