Munich Personal RePEc Archive

How did the Malaysian real exchange rate misalign during the 1997 Asian crisis?

niaz ahmad mohd, Naseem and yusop, Zulkornain and masron, Tajul ariffin (2009): How did the Malaysian real exchange rate misalign during the 1997 Asian crisis? Published in: International Journal of Economics, Management and Accounting , Vol. 2, No. 18 (2010): pp. 161-195.

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Currency overvaluation seems to be the prominent explanation for the 1997–98 Asian financial crisis. Although this is the case, the reinstatement to managed float exchange rate regime in mid-2005, as well as the instability of commodity prices and the recent 2008–2010 global economic crisis, leads to the question of how far the fluctuation in the Malaysian ringgit is consistent with the changes in its economic fundamentals. Based on the theory of real equilibrium exchange rate, this paper estimates the NATREX approach to modeling the Malaysian equilibrium exchange rate from 1991 to 2009. The empirical results show that the ringgit took a U-turn from being overvalued during the pre-crisis (1991–1997) to being undervalued in the post-crisis (1997–2002) periods, before fluctuating around its long-run equilibrium for the rest of the period. This corroborated the hypothesis that an overvaluation leads to a currency crisis, which is followed by substantial currency devaluation. The misalignment rates then reduce and remain close to the equilibrium path.

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