On the predictive power of monetary exchange rate model

The case of the Malaysian ringgit/US dollar rate

Ahmad Zubaidi Baharumshah, Siti Hamizah Mohd, Sung K. Ahn

    Research output: Contribution to journalArticle

    7 Citations (Scopus)

    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 naïve random walk model. The monetary and Purchasing Power Parity (PPP) models do well at the four to eight quarters horizon.

    Original languageEnglish
    Pages (from-to)1761-1770
    Number of pages10
    JournalApplied Economics
    Volume41
    Issue number14
    DOIs
    Publication statusPublished - 2009

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    Exchange rates
    Predictive power
    Purchasing power parity
    Macroeconomic factors
    Long-run relationship
    Random walk model
    Economic fundamentals
    Out-of-sample forecasting

    ASJC Scopus subject areas

    • Economics and Econometrics

    Cite this

    On the predictive power of monetary exchange rate model : The case of the Malaysian ringgit/US dollar rate. / Baharumshah, Ahmad Zubaidi; Mohd, Siti Hamizah; Ahn, Sung K.

    In: Applied Economics, Vol. 41, No. 14, 2009, p. 1761-1770.

    Research output: Contribution to journalArticle

    Baharumshah, Ahmad Zubaidi ; Mohd, Siti Hamizah ; Ahn, Sung K. / On the predictive power of monetary exchange rate model : The case of the Malaysian ringgit/US dollar rate. In: Applied Economics. 2009 ; Vol. 41, No. 14. pp. 1761-1770.
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