Impact of Economic Factors towards Exchange Rate in Malaysia

Abstract

As the exchange rate is currently floating negatively in Malaysia, there is a need to investigate the impact of economic factors on Malaysia's exchange rate volatility. In this study, the annual time series data for foreign exchange rates, gross domestic product and unemployment rates obtained from the World Development Indicators (WDI) source. The data for inflation rates sourced from the Department Statistic of Malaysia website. The 120 observations data tested from 1989 to 2018 using Eviews software. First, the data analyzed based on the descriptive statistics measure the mean, minimum, maximum, kurtosis, and skewness of the data or variables. The Augmented Dickey-Fuller (ADF) and Phillips-Perron (P.P.) used to test the data stationarity. The correlation test is performed to investigate any correlation between the variables. Lastly, the multiple regression analysis examines the impacts and significance of the relationship between the variables. The findings demonstrate that there is a strong significant relationship between gross domestic product and exchange rate. However, unemployment and inflation show an insignificant relationship with exchange rate volatility. There is a strong significant relationship between gross domestic product, inflation with the exchange rate. However, unemployment shows an insignificant relationship with the exchange rate. This study indicated economic factors that increase gross domestic product and inflation, significantly impacting the exchange rate. To maintain Malaysia's exchange rate stability, Malaysia needs to look into their monetary policy closely.

Ere Outbreak in Malaysia: Macroeconomic Factors and Variability in Exchange Rates

“…For many years, a debate on the factors that influence the variability of the exchange rate has been widely discussed by a number of scholars (Isard, 1980;Nicita, 2013;Patosa & Cruz, 2012;Umar et. al., 2019;Mohamed et al, 2021;Abdul & Muhammad, 2022). Changes in the exchange rate can be affected by the money supply, unemployment, inflation, and interest rates, making it vital to the economic health of any country that allows free trade of goods and services.…”

“…On December 1, 2014, the Ringgit had its most substantial two-day depreciation since the 1997-1998 Asian financial crisis, from 3.3465 per U.S. Dollar, falling 2.4 percent to 3.4300 to the U.S. Dollar at closing. Then, it stated that Ringgit had dropped for four consecutive weeks in the year's longest losing stretch so far, in June 2015 (Mohamed et al. 2021) Figure 1: Monthly Historical Exchange Rate from February 2015 to February 2020…”

“…At the same time, Bank Negara did not peg the MYR and let the capital institution control Malaysia. This reason because the exchange rate regime can aid the country in adopting the changes value of the Ringgit (Mohamed et al 2021). Malaysia is a developing country, and thus exchange rate has become crucial for huge import and export systems.…”