Abstract
This study examines the empirical link between exchange rates and fundamentals using the monetary model of the exchange rate for the Malaysian ringgit and the Singapore dollar against two key bilateral rates - the US dollar and the Japanese yen. We formally tested for the long-run monetary model of exchange rate determination and found several interesting results. First, a unique cointegrating relationship was identified, based on theory and data, which means that monetary variables and the exchange rate are connected. Second, we found that it is the exchange rate that adjusts to the long-run equilibrium after a shock and not the other way round. Finally, it is shown that the fundamentals-based model produced out-of-sample forecasts that can outperform a random walk model both in the medium and long terms.
| Original language | English |
|---|---|
| Pages (from-to) | 123-141 |
| Number of pages | 19 |
| Journal | Malaysian Journal of Economic Studies |
| Volume | 47 |
| Issue number | 2 |
| Publication status | Published - Dec 2010 |
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Keywords
- Exchange rates
- F41
- Fundamentals
- Out-of-sample forecasts JEL classification: F31
ASJC Scopus subject areas
- Economics, Econometrics and Finance(all)
Cite this
Exchange rates in Singapore and Malaysia : Are they driven by the same fundamentals? / Baharumshah, Ahmad Zubaidi; MacDonald, Ronald; Mohd, Siti Hamizah.
In: Malaysian Journal of Economic Studies, Vol. 47, No. 2, 12.2010, p. 123-141.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Exchange rates in Singapore and Malaysia
T2 - Are they driven by the same fundamentals?
AU - Baharumshah, Ahmad Zubaidi
AU - MacDonald, Ronald
AU - Mohd, Siti Hamizah
PY - 2010/12
Y1 - 2010/12
N2 - This study examines the empirical link between exchange rates and fundamentals using the monetary model of the exchange rate for the Malaysian ringgit and the Singapore dollar against two key bilateral rates - the US dollar and the Japanese yen. We formally tested for the long-run monetary model of exchange rate determination and found several interesting results. First, a unique cointegrating relationship was identified, based on theory and data, which means that monetary variables and the exchange rate are connected. Second, we found that it is the exchange rate that adjusts to the long-run equilibrium after a shock and not the other way round. Finally, it is shown that the fundamentals-based model produced out-of-sample forecasts that can outperform a random walk model both in the medium and long terms.
AB - This study examines the empirical link between exchange rates and fundamentals using the monetary model of the exchange rate for the Malaysian ringgit and the Singapore dollar against two key bilateral rates - the US dollar and the Japanese yen. We formally tested for the long-run monetary model of exchange rate determination and found several interesting results. First, a unique cointegrating relationship was identified, based on theory and data, which means that monetary variables and the exchange rate are connected. Second, we found that it is the exchange rate that adjusts to the long-run equilibrium after a shock and not the other way round. Finally, it is shown that the fundamentals-based model produced out-of-sample forecasts that can outperform a random walk model both in the medium and long terms.
KW - Exchange rates
KW - F41
KW - Fundamentals
KW - Out-of-sample forecasts JEL classification: F31
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UR - http://www.scopus.com/inward/citedby.url?scp=79960190448&partnerID=8YFLogxK
M3 - Article
VL - 47
SP - 123
EP - 141
JO - Malaysian Journal of Economic Studies
JF - Malaysian Journal of Economic Studies
SN - 1511-4554
IS - 2
ER -