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On the predictive power of monetary exchange rate model: the case of the Malaysian ringgit/US dollar rate

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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 naive random walk model. The monetary and Purchasing Power Parity (PPP) models do well at the four to eight quarters horizon.
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Document Type: Research Article

Affiliations: 1: Faculty of Economics and Management, Department of Economics, Universiti Putra Malaysia, Selangor, Malaysia 2: Faculty of Economics and Business, School of Economics, Universiti Kebangsaan Malaysia, Selangor, Malaysia 3: Department of Management and Operations, College of Business, Washington State University, Pullman, WA 99164-4736, USA

Publication date: 2009-06-01

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