Determinant of Foreign Exchange Rate in Malaysia

Ong, Wei Du (2019) Determinant of Foreign Exchange Rate in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

Foreign exchange rate is a hot topic nowadays due to it relationship toward international trade. As Malaysia is an export oriented country, the fluctuation of exchange rate will bring negative impact to the country economy. Based on the past researches, some of the macroeconomic variable can affect country foreign exchange rate. However which variables are significantly affect the rate is an arguable question. In this research, Malaysia exchange rate, lending interest rate, total reserve and export import ratio will be used as the variables. The sample size will be 39 years where the period will be from 1977 to 2016 and all the data is taken from World Bank. The purpose of conducting this research is to examine whether lending interest rate, total reserve and export import ratio can significantly affect Malaysia exchange rate. Johansen cointegration test, VECM and Granger causality test was implemented in generating the long run, short run and causality result to fulfil the objective of research. It was found that the model of this research shows that there is one cointegration long run relationship based on the maximum eigenvalue test from Johansen cointegration test. Besides that, the VECM test has also proven short run relationship to exist in this model. Moreover based on Granger causality test, there are bidirectional causality between exchange rate and total reserve as well as total reserve and lending interest rate. Unidirectional causality also had been observed between other variables. Through this research, the relationship between exchange rate, lending interest rate, total reserve and export import ratio can be attest. These macroeconomic variables can significantly affect exchange rate in Malaysia.