Journal of Business & Financial Affairs

Flexible Exchange Rate, Financial Development and Economic Performance in Malaysia: An Econometric Analysis

Abstract

Ram N. Agarwal

In this paper evidence on whether Malaysia’s, Bank Negara policy of allowing flexible exchange rate along with financial development has affected the volatility of real macroeconomic variables like trade, foreign investment and economic growth is presented. An econometric framework is also utilized to examine the linkages between the exchange rate and the real economy. Different indicators of financial development and exchange rate variability are used. Results are found to vary with the indicators used. Correlation matrix shows that Variability in real effective exchange rate has an adverse effect on the inflow of FDI and economic growth. While the development of Capital market has a positive correlation with FDI, trade and economic growth. Credit to the private sector by the financial institutions has a positive impact on the international trade intensity. Regression results show that variability in exchange rate has a significant negative impact on economic growth. While its effect on trade intensity is not conclusive.