Effect of Exchange Rate Fluctuations on Trade Malaysia

Pang, Mei Yean (2025) Effect of Exchange Rate Fluctuations on Trade Malaysia. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigated the relationship between macroeconomic factors such as exchange rate, inflation and FDI influencing trade Malaysia over the period 1985-2023. The study used the Autoregressive Distributed Lag (ARDL) model to examine the long-run and short-run effect of exchange rate fluctuations on trade Malaysia. The findings of this study indicate that there is no significant short-run relationship between the macroeconomic factors and trade. The results indicate a delayed effect, meaning these variables do not affect trade immediately but gradually influence it over time. On the other hand, the empirical results indicate a significant negative long-run relationship between exchange rate and trade. This indicates that the exchange rate weakens for a long time, trade tends to go down. This study also found a negative long-run relationship with inflation, but a positive long-run relationship with foreign direct investment (FDI), indicating that higher inflation may impact trade Malaysia, while stable or lower investment costs in an inflationary environment may attract more FDI. Because exchange rate fluctuations affect trade with a time lag, the Malaysian government and central bank should prioritize exchange rate stability and credibility to promote sustainable economic growth Besides, a forward-looking exchange rate policy should be established for stable and predictable exchange rate of the country, which could help boost trade and attract foreign investment over time.