Munich Personal RePEc Archive

Should Malaysia depreciate her exchange rate ?

Ghazali, Ummu and Masih, Mansur (2018): Should Malaysia depreciate her exchange rate ?

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There is a wide discussion as to whether Malaysia should depreciate its exchange rate or not and the economists have different points of view because it might have either a good or bad impact on the Malaysian economy. Hence, the purpose of this study is to investigate the relationship between exchange rate, capital flows and inflation in order to test the effect of Malaysian exchange rate depreciation on the economy. This study employs standard time series techniques such as cointegration test, LRSM, VECM, VDC . The analysis tends to indicate that exchange rate, capital flows and inflation rate do move together as evidenced by their cointegration and that the exchange rate is determined exogenously as evidenced in the Generalized Variance Decomposition (VDC) tests. In other words, the Malaysian exchange rate leads (rather than follows) inflation and capital flows. The results are plausible and intuitive and have strong policy implications for the policy makers of an emerging economy like Malaysia.

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