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Exchange Rate – Relative Price Nonlinear Cointegration Relationship in Malaysia


  • Venus Khim-Sen Liew

    () (Labuan School of International Business and Finance, Universiti Malaysia Sabah)

  • Chee-Keong Choong

    () (Faculty of Accountancy and Management, Universiti Tunku Abdul Rahman)

  • Evan Lau

    () (Faculty of Economics and Business, Universiti Malaysia Sarawak)

  • Kian-Ping Lim

    () (Labuan School of International Business and Finance, Universiti Malaysia Sabah)


The finding of exchange rate–relative price nonlinear cointegration relationship in Malaysia, among others, suggests that nonlinear Purchasing Power Parity (PPP) equilibrium may be regarded as reference point in judging the short run misalignment of the Ringgit currency and thereby deducing effective policy actions. Moreover, economists who wish to extend the simple PPP exchange rate model into the more complicated monetary exchange models may do so comfortably, at least in the text of Malaysia. Nonetheless, such attempt should be tailored in a nonlinear way to suit the nonlinear characteristic of exchange rate behaviour

Suggested Citation

  • Venus Khim-Sen Liew & Chee-Keong Choong & Evan Lau & Kian-Ping Lim, 2005. "Exchange Rate – Relative Price Nonlinear Cointegration Relationship in Malaysia," Economics Bulletin, AccessEcon, vol. 6(11), pages 1-16.
  • Handle: RePEc:ebl:ecbull:eb-05f30006

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    References listed on IDEAS

    1. Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
    2. Kapetanios, George & Shin, Yongcheol & Snell, Andy, 2003. "Testing for a unit root in the nonlinear STAR framework," Journal of Econometrics, Elsevier, vol. 112(2), pages 359-379, February.
    3. Taylor, Mark P & Peel, David A & Sarno, Lucio, 2001. "Nonlinear Mean-Reversion in Real Exchange Rates: Toward a Solution to the Purchasing Power Parity Puzzles," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 42(4), pages 1015-1042, November.
    4. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 689-712.
    5. Ma, Yue & Kanas, Angelos, 2000. "Testing for nonlinear Granger causality from fundamentals to exchange rates in the ERM," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 10(1), pages 69-82, January.
    6. Francisco Maeso-Fernandez, 1998. "Econometric methods and purchasing power parity: short- and long-run PPP," Applied Economics, Taylor & Francis Journals, vol. 30(11), pages 1443-1457.
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    9. Garratt, Anthony & Psaradakis, Zacharias & Sola, Martin, 2001. "An empirical reassessment of target-zone nonlinearities," Journal of International Money and Finance, Elsevier, vol. 20(4), pages 533-548, August.
    10. Taylor, Mark P. & Peel, David A., 2000. "Nonlinear adjustment, long-run equilibrium and exchange rate fundamentals," Journal of International Money and Finance, Elsevier, vol. 19(1), pages 33-53, February.
    11. Ashok Parikh & Geoffrey Williams, 1998. "Modelling real exchange rate behaviour: a cross-country study," Applied Financial Economics, Taylor & Francis Journals, vol. 8(6), pages 577-587.
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    13. Alipasha Razzaghipour & Grant Fleming & Richard Heaney, 2001. "Deviations and mean reversion to purchasing power parity in the Asian currency crisis of 1997," Applied Economics, Taylor & Francis Journals, vol. 33(9), pages 1093-1100.
    14. Venus Khim-Sen Liew & Terence Tai-Leung Chong & Kian-Ping Lim, 2003. "The inadequacy of linear autoregressive model for real exchange rates: empirical evidence from Asian economies," Applied Economics, Taylor & Francis Journals, vol. 35(12), pages 1387-1392.
    15. Holmes, Mark J., 2001. "New Evidence on Real Exchange Rate Stationarity and Purchasing Power Parity in Less Developed Countries," Journal of Macroeconomics, Elsevier, vol. 23(4), pages 601-614, October.
    16. Hasan, Zubair, 1999. "Recent financial crisis in Malaysia: response, results, challenges," MPRA Paper 21844, University Library of Munich, Germany, revised 2000.
    17. Dumas, Bernard, 1992. "Dynamic Equilibrium and the Real Exchange Rate in a Spatially Separated World," Review of Financial Studies, Society for Financial Studies, vol. 5(2), pages 153-180.
    18. Lucio Sarno, 2000. "Real exchange rate behaviour in high inflation countries: empirical evidence from Turkey, 1980-1997," Applied Economics Letters, Taylor & Francis Journals, vol. 7(5), pages 285-291.
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    20. Sabate, Marcela & Gadea, Maria Dolores & Serrano, Jose Maria, 2003. "PPP and structural breaks. The peseta-sterling rate, 50 years of a floating regime," Journal of International Money and Finance, Elsevier, vol. 22(5), pages 613-627, October.
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    Cited by:

    1. Brian Francis & Sunday Iyare, 2006. "Do exchange rates in caribbean and latin american countries exhibit nonlinearities?," Economics Bulletin, AccessEcon, vol. 6(14), pages 1-20.

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    JEL classification:

    • F3 - International Economics - - International Finance


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