Macroeconomic Determinants of the Malaysian Ringgit Exchange Rate (1972-2022)

Haw, Zhao Hong (2025) Macroeconomic Determinants of the Malaysian Ringgit Exchange Rate (1972-2022). Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the macroeconomic factors influencing the Malaysian Ringgit (MYR) exchange rate from 1972 to 2022. The primary goal is to analyze the relationships between key economic indicators such as Consumer Price Index (CPI), lending interest rates, public debt, national output, and foreign exchange reserves, and their impact on the MYR. Drawing on secondary data from sources such as the World Bank and Malaysia's Ministry of Finance, the research offers a comprehensive analysis over 51 years, providing historical insights into the interactions between macroeconomic variables and the MYR exchange rate. The study's theoretical framework is grounded in established models like Purchasing Power Parity (PPP), Interest Rate Parity (IRP), and asset market approaches. These models help explain the influence of inflation, interest rates, national output, public debt, and reserves on currency values. Methodologically, the study employs tools such as the Augmented Dickey- Fuller (ADF) test, Vector Autoregression (VAR), and the Johansen-Juselius cointegration test to assess both short- and long-term relationships among the variables. Results indicate that CPI, lending interest rates, national output, and foreign exchange reserves have a significant influence on the MYR, aligning with global trends. However, the relationship between public debt and the exchange rate is negative and contrasts with typical findings, suggesting that a 1% increase in public debt can lead to a appreciation of the Ringgit, assuming other factors remain constant. In the short term, public debt can drive economic growth when used for productive investments, consistent with Keynesian theory. However, excessive long-term debt can increase exchange rate volatility, raise interest rates, and hinder growth, ultimately leading to currency depreciation. The study also highlights the limitations of relying on secondary data and the challenges of isolating external shocks, such as the 1997 Asian Financial Crisis and the COVID-19 pandemic, in analyzing exchange rate movements. Based on the findings, policy recommendations include strengthening foreign exchange reserves and managing public debt to mitigate currency volatility. The insights provided can guide policymakers in safeguarding the Malaysian Ringgit against future economic uncertainties. Future research could consider additional factors like political stability and global trade dynamics to further explain MYR volatility. This study enhances the understanding of exchange rate economics in emerging markets and offers practical policy implications for maintaining currency stability in Malaysia. It also provides a foundational model that can be applied to other economies to explore the effects of macroeconomic factors on national currencies.