The Impact of Exchange Rate on Inflation in Malaysia

Chong, Zun Hong (2024) The Impact of Exchange Rate on Inflation in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study attempts to examine how exchange rates affect inflation in Malaysia. This study uses annual data from 1979 to 2022 to examine the short-run and long-run relationships between independent variables such as exchange rates, real interest rates, and GDP. To achieve the objective, this study employed the autoregressive distributed lag (ARDL), Granger causality test and other diagnostic tests. The result shows that exchange rate has a positive long-run relationship with inflation, but it is not statistically significant. This study also found an insignificant negative long-run relationship between interest rates and inflation. Interestingly, the impact of economic growth on inflation has a statistically significant negative value. While promoting economic growth, policymakers are advised to devise inflation targeting policies necessary to control the inflationary pressures.