Analysis of macroeconomic variable shocks on the equilibrium of real effective exchange rates in Malaysia

This study investigates the effect and equilibrium of macroeconomic variables on real effective exchange rates (REER) in short and long terms in Malaysia. This study used time series data from 1986–2017, and Johansen-Juselius and error correction model (ECM). There are two main findings in this study. First, economic openness and inflation have a significant effect on real effective exchange rates in Malaysia. Second, in the short term, foreign direct investment (FDI) and inflation disrupt the balance of effective real exchange rates, although in the long terms the inflation will return to its equilibrium. This research is recommended to the government to increase foreign direct investment in Malaysia, because it is a major factor that influences the equilibrium of real effective exchange rates.