The real exchange rate and economic performance: insights from the Malaysian experience
Creators: name: Ghazali, Siti Kamariah
Publisher: name: The Australian National University
Year: 2022

description: The real exchange rate (RER), theoretically defined as the relative price of tradable goods to non-tradable goods, plays an important role in economic performance and structural adjustment in developing and emerging market economies. However, the debate on the measurement of the RER, the economic impact of RER misalignment, and the role of RER in economic performance are far from settled. This thesis aims to contribute to this debate by undertaking an in-depth study of the Malaysian experience. Following a state-setting survey of macroeconomic policy and performance of the Malaysian economy during 1960-2020 in Chapter 2, the thesis contains three core chapters written in the form of self-contained research essays. The analysis is based on a new dataset compiled from published and unpublished Malaysian sources and international databases. The Autoregressive Distributed Lag (ARDL) method is used in the econometric analysis. This method has the advantage of estimating long-run and short-run relationships between variables while minimising the possible endogeneity bias by reparametrising the model in error-correction form. The first core chapter (Chapter 3) investigates the source of RER movements and assesses how much RER is misaligned from the relevant macroeconomic fundamentals. The comparative analysis of RER measurement undertaken at the outset of the empirical analysis suggests that the standard IMF index that does not distinguish between tradable and non-tradable production tends to overstate RER changes. The analysis based on a theoretically consistent RER index indicates that technological progress, capital inflows, and government interventions play a significant role in Malaysia's long-term RER movement. Meanwhile, the exchange rate regime choice influenced the RER movement in the short-term. Throughout the period selected for analysis, the Malaysian economy experienced several episodes of RER misalignment, with undervaluation dominating the overall pattern. Chapter 4 analyses the impact of RER misalignment on total economic and sectoral performance covering the years 1970 to 2018. The result indicates that overall misalignment does not have an impact on economic performance. However, RER undervaluation promotes economic growth with a significant positive impact of RER undervaluation on the tradable sector driving the outcome. Chapter 5 examines the role of RER in export performance in the growing importance of global production sharing (GPS) and China's role in the global trade market. The export performance is analysed using panel data from 1992 to 2019, and the result indicated here is that RER depreciation promotes export performance in most product categories. Products exported within global production networks (GPNs) are found to be highly sensitive to the RER changes. The finding also demonstrates that China's rise in the global economy has had a significant negative impact on manufactured goods exported from Malaysia. The key findings of the three core chapters and policy recommendations are summarised in the concluding chapter.