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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.

Suggested Citation

  • Ahmad Zubaidi Baharumshah & Siti Hamizah Mohd & Sung Ahn, 2009. "On the predictive power of monetary exchange rate model: the case of the Malaysian ringgit/US dollar rate," Applied Economics, Taylor & Francis Journals, vol. 41(14), pages 1761-1770.
  • Handle: RePEc:taf:applec:v:41:y:2009:i:14:p:1761-1770
    DOI: 10.1080/00036840902817771
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    References listed on IDEAS

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    1. Baig, Taimur & Goldfajn, Ilan, 2002. "Monetary Policy in the Aftermath of Currency Crises: The Case of Asia," Review of International Economics, Wiley Blackwell, vol. 10(1), pages 92-112, February.
    2. Menzie David Chinn, 1999. "Measuring Misalignment; Purchasing Power Parity and East Asian Currencies in the 1990s," IMF Working Papers 99/120, International Monetary Fund.
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    Cited by:

    1. Hoda SELIM, "undated". "Has Egypt's Monetary Policy Changed after the Float?," EcoMod2010 259600152, EcoMod.
    2. 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.
    3. 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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