Lee, Chin and M., Azali and Yusop, Zulkornain and Yusoff, Mohammed (2008): Is Malaysia exchange rate misalignment before the 1997 crisis? Published in: Labuan Bulletin of International Business & Finance , Vol. 6, No. December (2008): pp. 1-18.
Download (147kB) | Preview
This paper seeks to use the flexible-price monetary model in the cointegration and vector error correction model (VECM) contexts to determine whether there was misalignment in the Malaysian ringgit - U.S. dollar before the 1997 currency crisis. Unit roots, cointegration and weak exogeneity are tested to validate the monetary exchange rate model. Generally, it is found that all the series are I(1) process and there exists significant cointegrating vectors. Using the cointegrating vector and the final parsimonious VECM, out of sample predictions for Ringgit exchange rate are generated. The resulting residuals between the actual and the fitted values of exchange rate are the estimated misalignments. From cointegration, our results suggest that the Malaysian ringgit was overvalued from 1995Q2-1997Q2. Based on VECM, our results suggest that ringgit was overvalued from 1995Q2-1996Q2 and slightly undervalued from 1996Q3-1997Q2.
|Item Type:||MPRA Paper|
|Original Title:||Is Malaysia exchange rate misalignment before the 1997 crisis?|
|Keywords:||Monetary Model, Exchange Rate, Misalignment, Malaysia|
|Subjects:||F - International Economics > F3 - International Finance > F31 - Foreign Exchange
G - Financial Economics > G0 - General > G01 - Financial Crises
|Depositing User:||Chin Lee|
|Date Deposited:||02 Aug 2012 12:50|
|Last Modified:||04 Oct 2016 18:20|
Baffes, J.; Elbadawi, I. A. and O’Connell, S. A. (1999) Single estimation of the equilibrium real exchange rate. In L. E. Hinkle and P. J. Montiel (Eds.). Exchange rate misalignment: Concepts and measurement for developing countries. Washington: Oxford University Press, Inc.
Berg, A., Borensztein, E., Milesi-Ferretti, G.M., Pattillo, C. (2000) Anticipating balance of payments crises the role of early warning systems. IMF Occasional Paper 186. IMF, Washington, DC.
Bilson, J. F. O. (1978) Rational expectations and the exchange rate. In J. A. Frankel and H. G. Johnson (Eds.). The economics of exchange rates. Mass: Addison-Wesley.
Chand, S. (2001) How misaligned is the Australian real exchange rate? Technical report economics of development working papers. APSEG: The Australian National University.
Chinn. M. D. (2000) Before the fall: Were East Asian currencies overvalued? Emerging Market Review, 1, 101-126.
Chinn, M. D. and Dooley, M. P. (1999) International monetary arrangements in the Asia-Pacific before and after. Journal of Asian Economics, 10, 361-384.
Civcir, I. (2004) The long-run validity of monetary exchange rate model for a high inflation country and misalignment: The case of Turkey. Emerging Markets Finance and Trade, 40, 84-100.
Dickey, D. A and Fuller, W. A. (1979) Distribution of the estimators for autoregressive time series with a unit root. Journal of American Statistical Association, 74, 427-431.
Dickey, D. A. and Fuller, W. A. (1981) Likelihood ratio statistics for autoregressive time series with a unit root. Econometrica, 49, 1057-1072.
Dornbusch, R. (1976) Expectations and exchange rate dynamics. Journal of Political Economy, 84, 1161-1176.
Edwards, S. (2001) Exchange rate regimes, capital flows and crisis prevention. NBER Working Paper No. 8529.
ÉGert, B.; Halpern, L. and MacDonald, R. (2006) Equilibrium exchange rates in transition economies: Taking stock of the issues. Journal of Economic Surveys, 20, 257-324.
Enders, W. (2004) Applied econometric time series. (2nd ed.). United States of America: John Wiley and Sons.
Engle, R. F. and Granger, C. W. J. (1987) Cointegration and error correction: Representation, estimation, and testing. Econometrica, 55, 251-276.
Frankel, J. A. (1979) On the Mark: A theory of floating exchange rates based on real interest differential. American Economic Review, 69, 610-622.
Frankel, J.A., Rose, A.K. (1996) Currency crashes in emerging markets: An empirical treatment. Journal of International Economics, 41, 351-368.
Frenkel, J. A. (1976) A monetary approach to the exchange rate: Doctrinal aspects and empirical evidence. In R. MacDonald and M. P. Taylor (Eds.). Exchange rate economics Volume I. Cambridge: Cambridge University Press.
Furman, J. and Stigliz, J. (1998) Economic crises: Evidence and insights from East Asia. Brookings Papers on Economic Activity, 2, 1-135.
Goldfajn, H. and Valdes, R. (1999) The aftermath of appreciations. Quarterly Journal of Economics, 114, 229-262.
Hodrick, R. J. (1978) An empirical analysis of the monetary approach to the determination of the exchange rate. In R. MacDonald and M. P. Taylor (Eds.), Exchange Rate Economics Volume I. Cambridge: Cambridge University Press.
Husted, S. and MacDonald, R. (1999) The Asian currency crash: Were badly driven fundamentals to blame? Journal of Asian Economics, 10, 537-550.
International Monetary Fund (various issues). International Monetary Fund’s International Financial Statistics Year Book. Washington D.C.: IMF.
Johansen, S. (1988) Statistical analysis of cointegration vectors. Journal of Economic Dynamics and Control, 12, 231-254.
Johansen, S. (1991) Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59, 1551-1580.
Johansen, S. and Juselius, K. (1990) Maximum likelihood estimation and inference on cointegration, with applications to the demand for money. Oxford Bulletin of Economics and Statistics, 52, 169-210.
Kakkar, V. (2001) Long run real exchange rates: Evidence from Mexico. Economics Letters, 72, 79-85.
Kaminsky, G. and Reinhart, C. (1999) Currency and banking crises: The early warnings of distress. American Economic Review, 89, 473-500.
Kemme, D. M. and Teng, W. Y. (2000) Determinants of the real exchange rate, misalignment and implications for growth in Poland. Economic Systems, 24, 171-205.
Kwek, K. T. and Yoong, F. Y. (2002) Is Ringgit Malaysia over-valued against the USD? Paper presented at 8th Convention of the East Asian Economic Association, 4-5 November 2002, Kuala Lumpur.
La Cour, L. and MacDonald, R. (2000) Modeling the ECU against the U.S. Dollar: A structural monetary interpretation. Journal of Business and Economic Statistics, 18, 436-450.
Lee, C. and Azali, M. (2005) Exchange rate misalignments in ASEAN-5 countries. Labuan Bulletin of International Business & Finance, 3, 11-31.
Lim, G. C. (2000) Misalignment and managed exchange rates: An application to the Thai Baht. IMF Working Paper (WP/00/63). International Monetary Fund.
Phillips, P. C. B. and Perron, P. (1988) Testing for a unit root in time series regression. Biometrika, 75, 335-346.
Sachs, J., Tornell, A., Velasco, A. (1996) Financial crises in emerging markets: the lessons from 1995. Brookings Papers on Economic Activity, 1, 147-215.
Saxena, S. C. (2002) Exchange rate dynamics in Indonesia: 1980-1998. Journal of Asian Economics, 13, 545-563.
Sazanami, Y. and Yoshimura, S. (1999) Restructuring East Asian exchange rate regimes. Journal of Asian Economics, 10, 509-523.
Tawadros, G. B. (2001) The predictive power of the monetary model of exchange rate determination. Applied Financial Economics, 11, 279-286.
Williamson, J. (1985) The Exchange Rate System. Washington, DC: Institute for International Economics.
Zhang, Z. C. (2001) Real exchange rate misalignment in China: An empirical investigation. Journal of Comparative Economics, 29, 80-94.