Impact of Economic Factors towards Exchange Rate in Malaysia

Abstract

As the exchange rate is currently floating negatively in Malaysia, there is a need to investigate the impact of economic factors on Malaysia's exchange rate volatility. In this study, the annual time series data for foreign exchange rates, gross domestic product and unemployment rates obtained from the World Development Indicators (WDI) source. The data for inflation rates sourced from the Department Statistic of Malaysia website. The 120 observations data tested from 1989 to 2018 using Eviews software. First, the data analyzed based on the descriptive statistics measure the mean, minimum, maximum, kurtosis, and skewness of the data or variables. The Augmented Dickey-Fuller (ADF) and Phillips-Perron (P.P.) used to test the data stationarity. The correlation test is performed to investigate any correlation between the variables. Lastly, the multiple regression analysis examines the impacts and significance of the relationship between the variables. The findings demonstrate that there is a strong significant relationship between gross domestic product and exchange rate. However, unemployment and inflation show an insignificant relationship with exchange rate volatility. There is a strong significant relationship between gross domestic product, inflation with the exchange rate. However, unemployment shows an insignificant relationship with the exchange rate. This study indicated economic factors that increase gross domestic product and inflation, significantly impacting the exchange rate. To maintain Malaysia's exchange rate stability, Malaysia needs to look into their monetary policy closely.