Is Malaysia exchange rate misalignment before the 1997 crisis?
This paper seeks to use the flexible-price monetary model in the cointegration and vector error correction model (VECM) contexts to determine whether there was misalignment in the Malaysian ringgit - U.S. dollar before the 1997 currency crisis. Unit roots, cointegration and weak exogeneity are t...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
Universiti Malaysia Sabah
2008
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/25907/ http://irep.iium.edu.my/25907/ http://irep.iium.edu.my/25907/1/IS_MALAYSIA_EXCHANGE_RATE_MISALIGNMENT_BEFORE.pdf |
| Summary: | This paper seeks to use the flexible-price monetary model in the
cointegration and vector error correction model (VECM) contexts to determine
whether there was misalignment in the Malaysian ringgit - U.S. dollar before
the 1997 currency crisis. Unit roots, cointegration and weak exogeneity are
tested to validate the monetary exchange rate model. Generally, it is found that
all the series are I(1) process and there exists significant cointegrating vectors.
Using the cointegrating vector and the final parsimonious VECM, out of sample
predictions for Ringgit exchange rate are generated. The resulting residuals
between the actual and the fitted values of exchange rate are the estimated
misalignments. From cointegration, our results suggest that the Malaysian
ringgit was overvalued from 1995Q2-1997Q2. Based on VECM, our results
suggest that ringgit was overvalued from 1995Q2-1996Q2 and slightly
undervalued from 1996Q3-1997Q2. |
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