Real Exchange Rate Misalignment and Economic Growth in Malaysia

Ng, Pey Horng (2020) Real Exchange Rate Misalignment and Economic Growth in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University College.

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Abstract

The movement of exchange rate has always been an economy highlight for Malaysia. This is because the total exports of goods and services has accounted about 43.1% of gross domestic product of Malaysia. For this reason, the movement of exchange rate is crucial in determining the future prospects of Malaysia. Therefore, this research aims to examine the impact of real exchange rate (RER) misalignment on economic growth in Malaysia by using annual time series data ranging from 1970 to 2018. Not only that, this research also examines the impact of trade openness and government expenditure on the economic growth of Malaysia. Specifically, the objectives of this research are to determine the long run relationship and short run causality between RER misalignment and economic growth of Malaysia. In this research, all the variables are first assessed with Unit Root Test and are proceeded with Johansen Juselius cointegration test to determine whether the variables are cointegrated with one and another. Then, the Vector Error Correction Model (VECM) is applied to identify the long run relationship among the variables and followed by the Granger Causality test to find out short run causality between the variables. Based on the results, it is revealed that there is a long run equilibrium relationship between real GDP per capita, RER misalignment, trade openness and government expenditure in Malaysia. The Granger Causality test showed that RER misalignment has a unilateral causal relationship with the real GDP per capita. The findings from the study recommend the policy makers should intervene into foreign exchange market to minimise the RER misalignment while maintaining it at a competitive level.