ON THE LINKAGES BETWEEN EXCHANGE RATE, INFLATION AND INTEREST RATE IN MALAYSIA: EVIDENCE FROM AUTOREGRESSIVE DISTRIBUTED LAG MODELING

To make broader policy decisions and have an economic glimpse, macroeconomic linkages are pertinent to the policy makers and the economists. The proper understanding of these interactions guides the monetary authorities to synthesize the appropriate monetary policy as well the as the political regimes to adopt feasible fiscal policy. Realizing the crucial importance of exchange rate, inflation and interest rate in an economy, this study investigates the interaction between the exchange rate and, inflation and interest rate in an important economy of Southeast Asia, Malaysia. Employing autoregressive distributed lags (ARDL) approach to co-integration and vector error correction model (VECM), we investigate the null hypothesis ( ) of no long run relationship as well the direction of the causality in case of rejection of ( ) in prior case. The findings suggest that the long run relationship is present between the interest rate and exchange rate, and inflation and exchange rate. Exchange rate experience the positive influence from interest rate whereas negative from inflation. Moreover, there is unidirectional causality from inflation and interest rate towards exchange rate.