The relationship between capital flow and exchange rate in Malaysia

Lee, Lim Shi (2012) The relationship between capital flow and exchange rate in Malaysia. Universiti Malaysia Sabah. (Unpublished)

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Abstract

This study aims is to determine the relationship between capital flow and exchange rate in Malaysia. This study analyzes time series data which comprised of annually data from 1970 until 2010. In this study, there are three steps that have to be carried out to analyze the data which are unit root test, cointegration test and Granger causality test. The empirical result shows that there exists a long-run relationship among the variables that are tested which included real exchange rate, short-term external, net capital inflows and government spending by using Johansen's cointegration test. The cointegrating vector suggests that real exchange rate is negatively related to short-term external debt, it is positively related to net capital inflows and government spending. Besides that, the results from the vector error correction model (VECM) give information regard on the effect of short-term external debt, net capital inflows and government expenditure on real exchange rate in Malaysia. Short-term external debt and government spending explains the most variations of real exchange rate in long-run while net capital inflows is significant only in short-run. The empirical result further shows that there are unidirectional causality from short-term external debt to real exchange rate and there is also exists a unidirectional causality from net capital inflows to real exchange rate. The contemporaneous value of real exchange rate can be Significantly improved by incorporating past value of short-term external debt and capital inflows. Capital flows have played an important role in explaining the dynamic changes in real exchange rate.

Item Type:	Academic Exercise
Keyword:	capital flow, exchange rate, time series, root test, cointegration test, Granger causality test, government spending
Subjects:	H Social Sciences > HF Commerce
Department:	SCHOOL > School of Science and Technology
Depositing User:	ADMIN ADMIN
Date Deposited:	27 Jun 2016 10:37
Last Modified:	07 Nov 2017 11:07
URI:	https://eprints.ums.edu.my/id/eprint/13532

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