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On the predictive power of monetary exchange rate model: the case of the Malaysian ringgit/US dollar rate

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  • Ahmad Zubaidi Baharumshah
  • Siti Hamizah Mohd
  • Sung Ahn

Abstract

The predictive power of the monetary model for the Malaysian ringgit/US dollar (RM/USD) rate is analysed using quarterly data ending in 2006:Q3. We find compelling evidence of a long-run relationship between exchange rates and the economic fundamental determinant. Macroeconomic factors systematically affect the long-run movement of the RM/USD rate. Additionally, the RM/USD rate was overvalued by about 10% several quarters before the 1997 crisis; after the crisis, rates fluctuated close to the equilibrium value. The out-of-sample forecasts demonstrate that the monetary model outperforms the naive random walk model. The monetary and Purchasing Power Parity (PPP) models do well at the four to eight quarters horizon.

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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 41 (2009)
Issue (Month): 14 ()
Pages: 1761-1770

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Handle: RePEc:taf:applec:v:41:y:2009:i:14:p:1761-1770

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Cited by:
  1. Venus Khim-Sen Liew & Ahmad Zubaidi Baharumshah & Chin-Hong Puah, 2009. "Monetary Model of Exchange Rate for Thailand: Long-run Relationship and Monetary Restrictions," Global Economic Review, Taylor & Francis Journals, vol. 38(4), pages 385-395.
  2. Lee, Chin & Law, Chee-Hong, 2013. "The Effects of Trade Openness on Malaysian Exchange Rate," MPRA Paper 45185, University Library of Munich, Germany.

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