On Malaysian Ringgit Exchange Rate Determination and Recent Depreciation
DOI:
https://doi.org/10.31436/ijema.v25i1.366Abstract
The Ringgit (MYR) has recently, since October 2015, suffered a large decline against most world currencies. In this study, based on the theory of exchange rate determination, we tested for a long run relationship between both MYRUSD and MYRGBP against the differential interest rate, differential money supply, price of world crude oil and Goods and Services Tax (GST, as dummy variable). We ran an Autoregressive Distributive Lag (ARDL) model on monthly data from January 2010 to January 2017. We found a negative long run relationship between MYRGBP and differential money supply and a positive long run relationship against the world crude oil price. As the Ringgit (MYR) supply increased relative to the British Pound, the Ringgit depreciated, and as the crude oil price strengthened, the Ringgit appreciated. A high dependency of the Ringgit on world crude oil implies a bad sign. In our view, Malaysia needs to work harder to attract foreign direct investment to maintain the value of the Ringgit at a healthy level.
References
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Chin, Lee, M. Azali, and K.G. Matthews. “The Monetary Approach to Exchange Rate Determination for Malaysia.†Applied Financial Economics Letters 3, no. 2 (2007): 91-4.
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Garton, Phil, Danial Gaudry, and Rhett Wilcox. “Understanding the Appreciation of the Australian Dollar and Its Policy Implications.†Economic Round-up 2 (2012): 39-61.
Ghosh, Sajal. “Examining Crude Oil Price–Exchange Rate Nexus for India During the Period of Extreme Oil Price Volatility.†Applied Energy 88, no. 5 (2011): 1886-9.
Groen, Jan J. “The Monetary Exchange Rate Model as a Long Run Phenomenon.†Journal of International Economics 52, no. 2 (2000): 299-319.
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Hyder, Zulfiqar, and Adil Mahboob. “Equilibrium Real Effective Exchange Rate and Exchange Rate Misalignment in Pakistan.†SBP Research Bulletin 2, no. 1 (2006).
Ibrahim, Mansor H., and Sulaiman Wan Yusoff. “Macroeconomic Variables, Exchange Rate and Stock Price: A Malaysian Perspective.†International Journal of Economics, Management and Accounting 9, no. 2 (2001): 141-63.
Insah, Baba, and Anthony Chiaraah. “Sources of Real Exchange Rate Volatility in the Ghanaian Economy.†Journal of Economics and International Finance 5, no. 6 (2013): 232-8.
Joyce, Joseph, and Linda Kamas. “Real and Nominal Determinants of Real Exchange Rates in Latin America: Short-Run Dynamics and Long Run Equilibrium.†The Journal of Development Studies 39, no. 6 (2003): 155-82.
Junttila, Juha, and Marko Korhonen. “Nonlinearity and Time-Variation in the Monetary Model of Exchange Rates.†Journal of Macroeconomics 33, no. 2 (2011): 288-302.
Kamin, Steven B., Sylvain Leduc, and Hilary Croke. “Financial Market Developments and Economic Activity during Current Account Adjustments in Industrial Economies.†FRB International Finance Discussion Paper 827 (2005).
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exchange.rate.pdf
Karfakis, Costas. “Is there an Empirical Link between the Dollar Price of the Euro and the Monetary Fundamentals?†Applied Financial Economics 16, no. 13 (2006): 973-80.
Khan, Muhammad Arshad, and Abdul Qayyum. “Exchange Rate Determination in Pakistan: Evidence Based on Purchasing Power Parity Theory.†Pakistan Economic and Social Review (2007): 181-202.
Kim-Hwa, Lim (2015). “Penang Economic Indicators.†http://penanginstitute.org/v3/files/research_papers/PEI_Jan%202015.pdf
Koranchelian, Taline. “The Equilibrium Real Exchange Rate in a Commodity Exporting Country: Algeria’s Experience.†IMF Staff Papers WP/05/135 (2005): 1-19.
Korhonen, Iikka, and Tuuli Juurikkala. “Equilibrium Exchange Rates in Oil-Exporting Countries.†Journal of Economics and Finance 33, no. 1 (2009): 71-9.
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Maeso-Fernandez, Francisco, Chiara Osbat, and Bernd Schnatz. “Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach.†Australian Economic Papers 41, no. 4 (2002): 437-61.
Makrydakis, S., P. De Lima, J. Claessens, and M. Kramer. “The Real Effective Exchange Rate of the Euro and Economic Fundamentals: A BEER Perspective.†Unpublished Working Paper, European Central Bank (2000).
Meerza, Syed Imran Ali. “Exchange Rate Determination of Bangladesh: A Cointegration Approach.†Journal of Economic Cooperation & Development 33, no. 3 (2012): 81-96.
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Mussa, Michael. “The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy Under a Regime of Controlled Floating.†In Flexible Exchange Rates and Stabilization Policy, edited by Jan Herin, Assar Lindbeck and Johan Myhrman, 97-116. London: Palgrave MacMillan, 1977.
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Narayan, Paresh Kumar, Seema Narayan, and Arti Prasad. “Understanding the Oil Price-Exchange Rate Nexus for The Fiji Islands.†Energy Economics 30, no. 5 (2008): 2686-96.
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OECD Statistics (2015). Organization for Economic Co-operation and Development. www.stats.oecd.org.
Olomola, Philip A., and Akintoye V. Adejumo. “Oil Price Shock and Macroeconomic Activities in Nigeria.†International Research Journal of Finance and Economics 3, no. 1 (2006): 28-34.
Omotor, Douglason GY. “Money Demand and Foreign Exchange Risk in Nigeria: A Cointegration Analysis using An ARDL Bounds Test.†International Journal of Economics, Management and Accounting 18, no. 1 (2010): 45-72.
Pancaro, Cosimo, and Christian Saborowski. “Current Account Reversals in Industrial Countries: Does the Exchange Rate Regime Matter?†International Journal of Finance & Economics 21, no. 2 (2016): 107-30.
Parveen, Shabana, Abdul Qayyum Khan, and Muammad Ismail. “Analysis of the Factors Affecting Exchange Rate Variability in Pakistan.†Academic Research International 2, no. 3 (2012): 670-4.
Pazarlioglu, M. Vedat, and Selcuk, Guloglu. (2007). “The Monetary Approach to Determination of Exchange Rate of Turkey.†Paper presented at the Eighth Econometrics and Statistics Congress, Inonu University, Turkey, 24-25 May 2007.
Pesaran, M. Hashem, Yongcheol Shin, and Richard J. Smith. “Bounds Testing Approaches to the Analysis of Level Relationships.†Journal of Applied Econometrics 16, no. 3 (2001): 289-326.
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Sun, Wei, and Lian An. “Dynamics of Floating Exchange Rate: How Important are Capital Flows Relative to Macroeconomic Fundamentals?" Journal of Economics and Finance 35, no. 4 (2011): 456-72.
Taylor, Lance. “Argentina: A Poster Child for the Failure of Liberalized Policies?†Challenge 44, no. 6 (2001): 28-44.
Wilson, Ian. “The Monetary Approach to Exchange Rates: A Brief Review and Empirical Investigation of Debt, Deficit, and Debt Management: Evidence from the United States.†The Journal of Business Inquiry 8, no. 1 (2009): 83-99.
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Zalduendo, Juan. “Determinants of Venezuela’s Equilibrium Real Exchange Rate.†IMF Working Paper No. 06/74 (2006).
Agbola, Frank W., and Chartri Kunanopparat. “Determinants of Exchange Rate Practices: Some Empirical Evidence from Thailand.†Applied Economics 37, no. 7 (2005): 807-16.
Ahmad, Mohd Naseem Niaz, Zulkornain Yusop, and Tajul Ariffin Masron. “How Did the Malaysian Real Exchange Rate Misalign During the 1997 Asian Crisis?†International Journal of Economics, Management and Accounting 18, no. 2 (2010): 161-95.
Ahmed, Saeed, Rehmat Ullah Awan, Maqbool H. Sial, and Falak Sher. “An Econometric Analysis of Determinants of Exchange Rate In Pakistan.†International Journal of Business and Social Science 3, no. 6 (2012):184-96.
Ajao, Mayowa G., and O.E. Igbekoyi. “The Determinants of Real Exchange Rate Volatility in Nigeria.†Academic Journal of Interdisciplinary Studies 2, no. 1 (2013): 459-71.
Amuedoâ€Dorantes, Catalina, and Susan Pozo. “Exchangeâ€Rate Uncertainty and Economic Performance.†Review of Development Economics 5, no. 3 (2001): 363-74.
Atif, Syed Muhammad, Moldir Sauytbekova, and James Macdonald. “The Determinants of Australian Exchange Rate: A Time Series Analysis.†MPRA Paper No. 42309 (2012).
Bahmani-Oskooee, Mohsen, and Orhan Kara. “Exchange Rate Overshooting in Turkey.†Economics Letters 68, no. 1 (2000): 89-93.
Bank Negara Malaysia. www.bnm.gov.my.
Bashir, Furrukh, and Adeel Luqman. “Long Run Determinants of Real Exchange Rate: An Econometric Analysis from Pakistan.†Pakistan Journal of Commerce and Social Sciences 8, no. 2 (2014): 471-84.
Basurto, Gabriela, and Atish Ghosh. “The Interest Rate–Exchange Rate Nexus in Currency Crises.†IMF Staff Papers 47 (2001).
Bilson, J.F.O. “The Current Experience with Floating Exchange Rates: An Appraisal of the Monetary Approach.†The American Economic Review 68, no. 2 (1978): 392-7.
Bloomberg (2015). Exchange Rate and Interest Rate Data, accessed 10th September 2015 via Bloomberg L.P.
Boyko, Nataliya. “The Monetary Model of Exchange Rate Determination: The Case of Ukraine.†Master’s thesis, Kyiv School of Economics, 2002.
Canales-Kriljenko, Jorge Iván, and Karl Habermeier. “Structural Factors Affecting Exchange Rate Volatility: A Cross-Section Study.†(2004): IMF Working paper: WP/04/147: 1-14.
Chang, Tsangyao, and Han-Wen Tzeng. “Long Run Purchasing Power Parity with Asymmetric Adjustment: Further Evidence from Nine Transition Countries.†Economic Modelling 28, no. 3 (2011): 1383-91.
Chen, Shiu-Sheng, and Hung-Chyn Chen. “Oil Prices and Real Exchange Rates.†Energy Economics 29, no. 3 (2007): 390-404.
Chin, Lee, M. Azali, and K.G. Matthews. “The Monetary Approach to Exchange Rate Determination for Malaysia.†Applied Financial Economics Letters 3, no. 2 (2007): 91-4.
David, K., Stonehill I. Arthur, and Moffett H. Michael. Multinational Business Finance. Boston: Addison–Wesley, 2001.
Dekle, Robert, Cheng Hsiao, and Siyan Wang. “High Interest Rates and Exchange Rate Stabilization in Korea, Malaysia, and Thailand: An Empirical Investigation of the Traditional and Revisionist Views.†Review of International Economics 10, no. 1 (2002): 64-78.
Dornbusch, R. “Expectations and Exchange Rate Dynamics.†The Journal of Political Economy 84, no. 6 (1976): 1161-76.
Égert, Balázs. “The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa.†Open Economies Review 21, no. 5 (2010): 655-77.
Federal Reserve. Federal Reserve Bank of St. Louis. https://research.stlouisfed.org.
Fida, Bashir Ahmad, Muhammad Majid Khan, and Muhammad Khalid Sohail. “Analysis of Exchange Rate Fluctuations and External Debt: Empirical Evidence from Pakistan.†African Journal of Business Management 6, no. 4 (2012): 1760-8.
Fleming, J. Marcus. “Domestic Financial Policies Under Fixed and Under Floating Exchange Rates.†IMF Staff Papers 9, no. 3 (1962): 369-80.
Frankel, Jeffrey. “The Mystery of the Multiplying Marks: A Modification of the 36 Monetary Model.†The Review of Economics and Statistics 64, no. 3 (1982): 515-9.
Frankel, Jeffrey. “On the Rand: Determinants of the South African Exchange Rate.†South African Journal of Economics 75, no. 3 (2007): 425-41.
Freund, Caroline. “Current Account Adjustment in Industrial Countries.†Journal of International Money and Finance 24, no. 8 (2005): 1278-98.
Frömmel, Michael, Ronald MacDonald, and Lukas Menkhoff. “Markov Switching Regimes in a Monetary Exchange Rate Model.†Economic Modelling 22, no. 3 (2005): 485-502.
Garton, Phil, Danial Gaudry, and Rhett Wilcox. “Understanding the Appreciation of the Australian Dollar and Its Policy Implications.†Economic Round-up 2 (2012): 39-61.
Ghosh, Sajal. “Examining Crude Oil Price–Exchange Rate Nexus for India During the Period of Extreme Oil Price Volatility.†Applied Energy 88, no. 5 (2011): 1886-9.
Groen, Jan J. “The Monetary Exchange Rate Model as a Long Run Phenomenon.†Journal of International Economics 52, no. 2 (2000): 299-319.
Gujarati, D. Basic Econometrics. Chicago: McGraw-Hill Publications, 2004.
Habib, Maurizio Michael, and Margarita M. Kalamova. “Are There Oil Currencies? The Real Exchange Rate of Oil Exporting Countries.†SSRN Working Paper Series 39 (2007):1-39.
Harberger, Arnold. “Economic Adjustment and the Real Exchange Rate.†In Economic Adjustment and Exchange Rates in Developing Countries, edited by Sebastian Edwards and Liaquat Ahamed. Chicago: University of Chicago Press, 1986.
Hakkio, C.S. “Exchange Rate Determination and the Demand for Money.†The Review of Economics and Statistics 64, no. 4 (1982): 681-6.
Hsieh, Wen Jun. “Study of the Behavior of the Indonesian Rupiah/US Dollar Exchange Rate and Policy Implications.†International Journal of Applied Economics 6, no. 2 (2009): 41-50.
Husain, Aasim M., Ashoka Mody, and Kenneth S. Rogoff. “Exchange Rate Regime Durability and Performance in Developing versus Advanced Economies.†Journal of Monetary Economics 52, no. 1 (2005): 35-64.
Hyder, Zulfiqar, and Adil Mahboob. “Equilibrium Real Effective Exchange Rate and Exchange Rate Misalignment in Pakistan.†SBP Research Bulletin 2, no. 1 (2006).
Ibrahim, Mansor H., and Sulaiman Wan Yusoff. “Macroeconomic Variables, Exchange Rate and Stock Price: A Malaysian Perspective.†International Journal of Economics, Management and Accounting 9, no. 2 (2001): 141-63.
Insah, Baba, and Anthony Chiaraah. “Sources of Real Exchange Rate Volatility in the Ghanaian Economy.†Journal of Economics and International Finance 5, no. 6 (2013): 232-8.
Joyce, Joseph, and Linda Kamas. “Real and Nominal Determinants of Real Exchange Rates in Latin America: Short-Run Dynamics and Long Run Equilibrium.†The Journal of Development Studies 39, no. 6 (2003): 155-82.
Junttila, Juha, and Marko Korhonen. “Nonlinearity and Time-Variation in the Monetary Model of Exchange Rates.†Journal of Macroeconomics 33, no. 2 (2011): 288-302.
Kamin, Steven B., Sylvain Leduc, and Hilary Croke. “Financial Market Developments and Economic Activity during Current Account Adjustments in Industrial Economies.†FRB International Finance Discussion Paper 827 (2005).
Kanamori, T. “The Renminbi Exchange Rate Revaluation: Theory, Practice, and Lessons from Japan.†Asian Development Bank Institute. May 2006. http://www.adbi.org/files/2006.05.09.book.renminbi.
exchange.rate.pdf
Karfakis, Costas. “Is there an Empirical Link between the Dollar Price of the Euro and the Monetary Fundamentals?†Applied Financial Economics 16, no. 13 (2006): 973-80.
Khan, Muhammad Arshad, and Abdul Qayyum. “Exchange Rate Determination in Pakistan: Evidence Based on Purchasing Power Parity Theory.†Pakistan Economic and Social Review (2007): 181-202.
Kim-Hwa, Lim (2015). “Penang Economic Indicators.†http://penanginstitute.org/v3/files/research_papers/PEI_Jan%202015.pdf
Koranchelian, Taline. “The Equilibrium Real Exchange Rate in a Commodity Exporting Country: Algeria’s Experience.†IMF Staff Papers WP/05/135 (2005): 1-19.
Korhonen, Iikka, and Tuuli Juurikkala. “Equilibrium Exchange Rates in Oil-Exporting Countries.†Journal of Economics and Finance 33, no. 1 (2009): 71-9.
Madura, Jeff. International Financial Management, 11th Edition, International Ed: South-Western, Cengage Learning, 2011.
Maeso-Fernandez, Francisco, Chiara Osbat, and Bernd Schnatz. “Determinants of the Euro Real Effective Exchange Rate: A BEER/PEER Approach.†Australian Economic Papers 41, no. 4 (2002): 437-61.
Makrydakis, S., P. De Lima, J. Claessens, and M. Kramer. “The Real Effective Exchange Rate of the Euro and Economic Fundamentals: A BEER Perspective.†Unpublished Working Paper, European Central Bank (2000).
Meerza, Syed Imran Ali. “Exchange Rate Determination of Bangladesh: A Cointegration Approach.†Journal of Economic Cooperation & Development 33, no. 3 (2012): 81-96.
Mundell, Robert A. “The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability.†IMF Staff Papers 9, no. 1 (1962): 70-9.
Mussa, Michael. “The Exchange Rate, the Balance of Payments and Monetary and Fiscal Policy Under a Regime of Controlled Floating.†In Flexible Exchange Rates and Stabilization Policy, edited by Jan Herin, Assar Lindbeck and Johan Myhrman, 97-116. London: Palgrave MacMillan, 1977.
Mussa, Michael. “The Theory of Exchange Rate Determination.†In Exchange Rate Theory and Practice. Edited by John F.O. Bilson and Richard C. Marston, 13-78. Chicago: University of Chicago Press, 1984.
Narayan, Paresh Kumar, Seema Narayan, and Arti Prasad. “Understanding the Oil Price-Exchange Rate Nexus for The Fiji Islands.†Energy Economics 30, no. 5 (2008): 2686-96.
Obstfeld, Maurice, and Kenneth Rogoff. “The Unsustainable US Current Account Position Revisited.†In G7 Current Account Imbalances: Sustainability and Adjustment. Edited by Richard H. Clarida, 339-76. Chicago: University of Chicago Press, 2007.
OECD Statistics (2015). Organization for Economic Co-operation and Development. www.stats.oecd.org.
Olomola, Philip A., and Akintoye V. Adejumo. “Oil Price Shock and Macroeconomic Activities in Nigeria.†International Research Journal of Finance and Economics 3, no. 1 (2006): 28-34.
Omotor, Douglason GY. “Money Demand and Foreign Exchange Risk in Nigeria: A Cointegration Analysis using An ARDL Bounds Test.†International Journal of Economics, Management and Accounting 18, no. 1 (2010): 45-72.
Pancaro, Cosimo, and Christian Saborowski. “Current Account Reversals in Industrial Countries: Does the Exchange Rate Regime Matter?†International Journal of Finance & Economics 21, no. 2 (2016): 107-30.
Parveen, Shabana, Abdul Qayyum Khan, and Muammad Ismail. “Analysis of the Factors Affecting Exchange Rate Variability in Pakistan.†Academic Research International 2, no. 3 (2012): 670-4.
Pazarlioglu, M. Vedat, and Selcuk, Guloglu. (2007). “The Monetary Approach to Determination of Exchange Rate of Turkey.†Paper presented at the Eighth Econometrics and Statistics Congress, Inonu University, Turkey, 24-25 May 2007.
Pesaran, M. Hashem, Yongcheol Shin, and Richard J. Smith. “Bounds Testing Approaches to the Analysis of Level Relationships.†Journal of Applied Econometrics 16, no. 3 (2001): 289-326.
Rahman, M.H., and S. Barua. “Recent Experiences in the Foreign Exchange and Money Markets.†Policy Note Series: PN 0703, Policy Analysis Unit (PAU), Bangladesh Bank, 2006.
Sun, Wei, and Lian An. “Dynamics of Floating Exchange Rate: How Important are Capital Flows Relative to Macroeconomic Fundamentals?" Journal of Economics and Finance 35, no. 4 (2011): 456-72.
Taylor, Lance. “Argentina: A Poster Child for the Failure of Liberalized Policies?†Challenge 44, no. 6 (2001): 28-44.
Wilson, Ian. “The Monetary Approach to Exchange Rates: A Brief Review and Empirical Investigation of Debt, Deficit, and Debt Management: Evidence from the United States.†The Journal of Business Inquiry 8, no. 1 (2009): 83-99.
Wong, Marie. “A Monetary Approach to the Sterling-US Dollar Exchange Rate.†Unpublished Working Paper, Middlesex University Business School, London, 2004.
Zada, B. “An Analysis of Factors Affecting Exchange Rate of Pakistan 1979-2008.†Master’s thesis, Hazara University, Pakistan, 2010.
Zalduendo, Juan. “Determinants of Venezuela’s Equilibrium Real Exchange Rate.†IMF Working Paper No. 06/74 (2006).
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Published
2017-05-31
How to Cite
Quadry, M. O., Mohamad, A., & Yusof, Y. (2017). On Malaysian Ringgit Exchange Rate Determination and Recent Depreciation. International Journal of Economics, Management and Accounting, 25(1), 1–26. https://doi.org/10.31436/ijema.v25i1.366
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