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Granger-causal relationship between real exchange rate and economic growth: Malaysia as a case study

Author

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  • Charnikat, Charnikat
  • Masih, Mansur

Abstract

This report tries to examine the Granger-causality relationship between real exchange rate and economic growth using Malaysia as a case study. Using standard time series techniques, we found that the real exchange rate is an exogenous variable to net import and GDP. The results based on the generalized variance decompositions (VDC) tend to indicate that the GDP is a lagging endogenous variable and could not impact the exchange rate. On the other hand, the change in real exchange rate can influence the economic growth. It is also found that the government policy in putting foreign exchange reserve can influence exchange rate and economic growth. In addition, since the exchange rate leads economic growth, the policies which claim to be able to influence the exchange rate, such as monetary policy, would benefit the policy makers from further studies.

Suggested Citation

  • Charnikat, Charnikat & Masih, Mansur, 2016. "Granger-causal relationship between real exchange rate and economic growth: Malaysia as a case study," MPRA Paper 108939, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:108939
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    References listed on IDEAS

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    More about this item

    Keywords

    Real exchange rate; economic growth; VECM; VDC; Malaysia;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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