HOW DID THE MALAYSIAN REAL EXCHANGE RATE MISALIGN DURING THE 1997 ASIAN CRISIS?
Currency overvaluation seems tobe the prominentexplanation for the 1997–98 Asian financialcrisis. Although this is the case, the reinstatement to managed float exchange rate regimeinmid-2005, as wellas the instability of commodity prices and the recent 2008–2010 global economic crisis, leads to the questionofhowfar the fluctuationinthe Malaysian ringgit isconsistentwiththe changes initseconomicfundamentals. Based on the theory of real equilibriumexchangerate, this paper estimates the NATREX approach tomodelingthe Malaysianequilibriumexchangerate from 1991 to2009. The empiricalresultsshow thatthe ringgittook a U-turn from being overvalued during the pre-crisis(1991–1997) tobeing undervalued inthe post-crisis (1997–2002) periods, before fluctuating around its long-run equilibriumfor the rest of the period. This corroborated the hypothesis that an overvaluation leads toa currencycrisis, which is followed bysubstantial currency devaluation.The misalignment rates then reduce andremainclose tothe equilibriumpath.
JEL Classification:C32, F31, F41
Keywords: Asiancrisis, Global financial crisis, Real exchange rate misalignment, NATREX model, Malaysia