Determinants of Exchange Rate in Malaysia

Kam, Zheng Thong (2024) Determinants of Exchange Rate in Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

Text 202405_BBBE3053_KAM ZHENG THONG (FULL FYP).pdf Restricted to Registered users only Download (5MB)

Abstract

This study explores the determinants of the Malaysian Ringgit (MYR) exchange rate by investigating the relationships between five key macroeconomic variables: the Consumer Price Index (CPI), interest rate (IR), money supply (MS), crude oil prices (COP), and trade openness (TO). Using econometric tools such as the Augmented Dickey-Fuller (ADF) test, Johansen cointegration test, Vector Error Correction Model (VECM), and Granger causality test, the research examines both short-run and long-run dynamics that influence the MYR. The study covers the period from 2000 to 2023 and identifies significant relationships between these variables and the exchange rate. The findings indicate that inflation (CPI) and money supply exert a depreciating effect on the exchange rate, while higher interest rates and crude oil prices lead to appreciation. Trade openness, though, increases the MYR’s exposure to external shocks, particularly during times of global economic instability. The study also finds that the Consumer Price Index and crude oil prices significantly influence interest rates, highlighting their role in shaping monetary policy. These insights provide valuable guidance for policymakers in managing exchange rate stability and formulating macroeconomic strategies. The results also emphasize the importance of addressing inflation and trade openness to enhance the resilience of the MYR in an increasingly interconnected global economy. Keywords: Exchange rate, Malaysian Ringgit (MYR), Consumer Price Index (CPI), Interest rate (IR), Money supply (MS), Crude oil prices (COP), Trade openness (TO), Vector Error Correction Model (VECM), Granger causality, Cointegration, Macroeconomic variables, Inflation, Monetary policy.