Impact of Exchange Rate on Economic Growth in Malaysia

Mok, Shin Yee (2024) Impact of Exchange Rate on Economic Growth in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

Exchange rate movements can impact the competitiveness of domestic industries. A depreciating currency can make imports relatively more expensive, encouraging domestic consumers and businesses to substitute domestic products for imported ones. This can stimulate domestic production, improve competitiveness, and foster productivity growth, ultimately contributing to economic growth. Hence, investigation of the relationship between exchange rate and economic growth is important for a country. This paper focus on the investigation of the impact of exchange rate on economic growth in Malaysia. The paper examines the long run and short run relationship between the economic growth and real effective exchange rate, FDI, trade balance, CPI and gross domestic savings. The annual time series data from 1993 to 2022 is used in the study. The dependent variable in the study is shown to be economic growth while the independent variables are real effective exchange rate, FDI, trade balance, CPI and gross domestic savings. In the study, the ARDL test is used to show the long run and short run relationship between the variables. Besides the study also utilizes Unit Root test to test whether the data is stationary or non-stationary. The estimated result concluded that only the variable trade balance and gross domestic savings are able to affect the economic growth in the short run and long run. For the variable real effective exchange rate and CPI are able to affect the economic growth in the short run but not in the long run. FDI is not significant to affect unemployment in the short and long run. Lastly, the research also mentions the limitations and recommended policy implications to further improve the study.