Explaining exchange rate volatility in malaysia

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Explaining exchange rate volatility in malaysia

This is an open access article distributed under the Creative Commons Attribution Licensewhich permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. Abstract This paper investigates the impact of foreign direct investment FDItrade openness, domestic demand, and exchange rate on the export performance of Bangladesh over the period of — using the vector error correction VEC model under the time series framework.

The stationarity of the variables is checked both at the intercept and intercept plus trend regression forms under the ADF and PP stationarity tests. The Johansen-Juselius procedure is applied to test the cointegration relationship between variables followed by the VEC regression model.

The empirical results trace a long-run equilibrium relationship in the variables. FDI is found to be an important factor in explaining the changes in exports both in the short run and long-run.

However, the study does not trace any significant causal relationship for the cases of trade openness, domestic demand, and exchange rate. The study concludes that Bangladesh should formulate FDI-led polices to enhance its exports.

These facts, in general, motivate to investigate the FDI-export relationship of a developing economy. Decade-wise average trend in exports, FDI, exchange rate, trade openness, and domestic demand in Bangladesh.

FDI Distribution between developed and developing economies — Bangladesh, being a member of the developing economies, deserves attention.

Explaining exchange rate volatility in malaysia

As a major vehicle of the export-led growth model, the government enacted the Foreign Private Investment Promotion and Protection Act in to provide a legal protection for FDI supplied in Bangladesh against state expropriation and nationalization.

To boost exports and to provide a congenial investment climate free from bureaucracy and institutional bottlenecks, the government established several Export Processing Zones EPZs in the s.

Simultaneously, the government pursued greater trade liberalization policy by introducing various fiscal and nonfiscal incentives to lure FDI.

In addition, the government gradually lifted restrictions on repatriation of capital and profits and unleashed almost all industrial sectors for foreigners investing independently or jointly with local partners [ 1 ].

Figure 3 presents the decade-wise average performance of exports, FDI, trade openness, exchange rate, and domestic demand in Bangladesh over the period of — It shows that the average exports expressed as the value of exports over GDP in Bangladesh increased from 5.

Likewise, the average economic openness, measured by the trade over GDP, increased significantly during the previous three decades, from Conversely, the average domestic demand measured by the government expenditure over GDP remained almost constant at 4.

Importantly, the relative strength of the domestic currency, Bangladeshi Taka BDTin terms of the US dollar decreased by almost two and a half times during the last three decades, from BDT As a whole, the positive trend of FDI, exports, domestic demand, trade openness, and exchange rate confirms that Bangladesh has adopted an export-led growth model by encouraging FDI, opening up the domestic market, and devaluing currency.

Direction of world exports — Constructed by author from the direction of trade statistics year book, IMF However, Figure 3 leaves two basic questions for investigation.

First, is there a long-term equilibrium link between FDI, economic openness, exchange rate, domestic demand, and export performance in the context of Bangladesh?

Second, is the link unidirectional or bidirectional? This paper attempts to address these questions empirically. The remainder of the paper proceeds as follows: Section 2 provides a brief survey of the empirical literature on the link between FDI, trade openness, exchange rate, domestic consumption, and exports.

Section 3 describes data and methodology of the study. Section 4 presents and analyzes the empirical results. Section 5 concludes and outlines some policy issues.

A Brief Survey of Empirical Literature The empirical works on the link between FDI, trade openness, exchange rate, domestic demand, and exports tend to be confounding. Likewise, a positive link between FDI and export was reported by Dritsaki et al. In addition, Petri et al.

T Hsiao and M. W Hsiao [ 20 ] unveiled an insignificant relationship between them.

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Similarly, the relationship found between exchange rates and exports in empirical literature is highly controversial. By the same token, ADB [ 27 ] reported a negative association between exports and growth rate of domestic demand in the southeast Asian countries, whereas Lai [ 28 ] reported a short-run bilateral causal connection between them.

Table 1 presents a summary of recent empirical studies that investigated the long-run relationship between FDI, trade openness, domestic demand, exchange rate, and exports using different estimation models.Impact of exchange rate volatility on import flows: the case of Malaysia and the United States pp.

Yii Siing Wong, Chong Mun Ho and Brian Dollery Going public abroad: the dynamics of return spillovers in an atypical international cross listing case pp. Influence of Interest Rates Determinants on the Performance of Commercial Banks in Kenya operating cost, credit risk and interest rate volatility, impact of monetary policy through changes in policy rates and reserve requirements and the structure of the industry, shows that the changes in the spot exchange rate between two countries.

The results here indicate that there is a significant short-run effect of exchange rate uncertainty on depth in the majority of 26 countries, explaining the fact that in the short run, there exists a strong link between exchange rate uncertainties or risks and financial deepening.

To examine the influence ofinflation rate, exchange rate and interest rate towards the price of gold in Malaysia. 2. To examine the most influential factor in determiningthe price of gold in Malaysia.

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explanation that has hitherto remained unexplored is the role of real exchange rate volatility. To be sure, past devaluations in Indonesia were all controlled ones in the sense that they involved a re-pegging of the rupiah at a new rate to the US dollar.

This paper develops an empirical model of bilateral exchange rate volatility. We conjecture that for developing economies, external financial liabilities have an important effect on desired bilateral exchange rate volatility, above and beyond the standard optimal currency area (OCA) factors.

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