Exchange rate and interest rate differential: the case of the Malaysian Ringgit/US Dollar

Abstract

The paper tests for the systematic empirical relationship between the Malaysian Ringgit/US Dollar real exchange rate and the real interest rate differential between Malaysia and the US using the Johansen maximum likelihood cointegration procedure. The results indicate the existence of a fairly robust long-run relationship between the real exchange rate and the real interest rate differential. The estimated error correction models also indicate the existence of stable adjustment dynamics when either the real exchange rate or the real exchange rate differential deviates from their long-run equilibrium position.