The Effect of Exchange Rates on Economic Growth: Empirical Testing on Nominal Versus Real

Abstract

This study attempts to investigate the effects of the exchange rates on economic growth in Malaysia using time series data spanning from 1971 to 2009. Both exchange rates, nominal and real, are considered to have similar effects on economic growth. The results of ARDL bounds test suggest that long-run cointegration exists between both nominal and real exchange rates and economic growth with a significant positive coefficient recorded for real exchange rate. In addition, the results of ECM-based ARDL also reveal that both exchange rates have a similar causal effect towards economic growth. Considering the importance of exchange rate variables, especially the real term, these findings eventually suggest that a systematic exchange rate via monetary policy should be properly developed to promote the stability and sustainability of economic growth in Malaysia.