Assessing the Determinants of Exchange Rate Stability: An Empirical Evidence in Malaysia

Abstract

This study empirically examined the effect of macroeconomic variables on the exchange rate of Malaysia Ringgit against the US dollar for the past 14-year on monthly basis from July 2005 to July 2019. The Real Exchange Rate of Malaysia Ringgit against the US dollar (EXC) has been used as a dependent variable where the other four macroeconomic components had been classified as the export (EXP), import (IMP), inflation (INF), and interest rate (INT) as independent variables. The result shows that the export (EXP) is positively significant at level 5%, the import (IMP) is negatively significant at 5% level of significance with the real exchange rate (EXC), the inflation (INF) is also negatively significant at 1% level of significance, and interest rate (INT) is not significant. The EXP has positively forced the exchange rate means that when the values of this variable increase the value of exchange will be increasing but in the case of IMP and INF is vice versa. The inflation is the most significant macroeconomic determinant of the exchange rate. These findings may give some overview of policy implications to the policymakers in optimizing the effects of macroeconomic variables towards the stability of the exchange rate.