CHAPTER FIVE CONCLUSION AND RECOMMENDATION 5.0 Introduction The final chapter in this study would be discussed on the finding that were obtained from the previous chapter together with its interpretation and also some policy recommendation that could help the country. Besides, the limitation of this study and recommendation for further studies would also be discussed in this chapter. The last part of this paper was conclusion which it would conclude the whole study. The purpose of this paper was to identify the factors that affecting the exchange rate in Malaysia and attempted to find the direction of the causal relationship between the exchange rate and the independent variables by using the time series models for the period 1981 to 2014. Furthermore, it was also to study the long run or short run relationship between the variables. Therefore the result of short run and long run and the causality relationship between the variables that had been obtained in chapter 4 would be discuss in this chapter. 5.1 Concluding Remarks The objective and purpose of this study had been set up to study the factor that affecting exchange rate in Malaysia. More specifically the objective of this study was to identify the causality between the exchange rate and the independent variables. In addition, the purpose was to see also whether the exchange rate and the independent variables possess any long run and short run relationship. This study had applied the modern time series techniques. It employed annual data covering the period of 1981 until 2014. Test for unit root test, Johansen and Juselius Cointegration test, Granger causality based on error correction model and variance decompositions were presented. Firstly, the empirical results and finding in Augmented Dickey Fuller (ADF) and Dickey-Fuller Generalized Least Squares (DFLGS), clearly shown, that all the variables are root to first different level I(1), and statistically significant at 5% significant level. This results was consistent with result found by previous study, which is by Baharumshah et al. (2010) and Estrada (2011). These finding suggest that all the variables are integrated of order one and this suggests that long – run relationship may exist between variables. Secondly, having determined and confirming that the results of unit root test for the series data of Malaysian exchange rate, net foreign assets (NFA), foreign exchange reserves (FER), stock market (STM), external debt (EXD), government consumption (GOVC), trade balance (TB) and inflation rate (INF) are stationary and integrated order one I(1), the study proceeds to test the cointegration of the variables. It was to examine whether there is a long run relationship or vice versa. Johansen and Juselius was carried out and indicated that there was three cointegrating vector between the exchange rate and stock market. This result was supported by Hsing (2015) and Saeed et al. (2012) where EXR and STM have long run effect in Malaysia. All the variables are cointegrated with the exchange rate and causally related at least one direction except for the government consumption and inflation rates. This result was supported in finding on normalized analysis results that showed there was a positive relationship between exchange rates and the independent variables in Malaysia. It means that when the independent variables increase, it would increase the exchange rate as well which also mean depreciation in the Ringgit. Third, the empirical results of Granger Causality based on vector error correction (VECM), suggested there was existence of a short run and long run unidirectional causal relationship (LEXR to LSTM and LFER, LNFA to LFER and LSTM, LEXD to LSTM and TB to LEXD). In addition, there is also existence of the bidirectional causal relationship between the exchange rate and net foreign assets. 5.2 Policy Implication and Recommendation The Malaysian authorities launched a policy package designed to insulate monetary policy from external volatility in September 1998. The exchange rate policy including the exchange rate pegged to U.S. dollar and selected exchange and capital controls, complemented by a fiscal stimulus package that stepped up capital spending. By accommodating macroeconomic policies, Malaysia’s recovery in 1999 until 2000 was among the strongest of the Asian crisis economies. It also allowing a buildup of international reserves when the external current account turned into large surpluses. However, downside risks for Malaysia have increased since the latter of 2000. Heavy dependence on electronic exports made Malaysia mostly sensitive to the global slowdown in information technology. Hence, it was resulting in large effective appreciation of the ringgit when the yen and other regional currencies had being a sharp depreciation during late March and April 2001. So, there are some policy makers that will promote the stability of the exchange rate as it was a primary objective of the exchange rate policy such as the monetary policy and fiscal policy. The effect of monetary policy is to lower the exchange rate, in the other hand, weaken the financial account and strengthen the current account. This is because the monetary policy is resulted in when the exchange rate is higher, it would make the financial account become stronger and weaker the current account. Align with this, it would rise the economic growth (GDP) and tend to increase the demand for imports that can cause the current account to deteriorate. It also would result in when the import purchased increase, the need to convert domestic to foreign currency also increase and will decrease the exchange rate of the domestic currency. The financial account had to move toward a surplus with no government intervention and it was due to the increasing in import, so the foreigners would have a surplus of the nation’s currency. To conclude, monetary policy can only create a cyclical movements. It tend to destabilize the economy and it can cause the trade balance to improve but in time progress, it only made the trade balance become more negative. The main important effect of the monetary policy in the long run is that it would lower the nation’s currency exchange rate (inflation). Next is the fiscal policy. Fiscal policy changes would produce both of the price and income effects for exchange rates and balance of payments. For the fiscal policy, the price effect is to raise the value of domestic currency, strengthen the capital account and weaken the current account. Fortunately, the impact of fiscal policy on exchange rate is not so clear. It was because the price and income effects both work in opposite directions. Income effect weaken the exchange rate but price effect strengthen the exchange rate. So, there come the fiscal policy stimulus. It would cause an appreciation on the domestic currency. It is good for economy when for example, when the government deficits would lead to increasing the interest rates or due to the higher interest rates would rise the domestic exchange rate and leads to rise in imports that can reduces GDP. 5.3 Limitation of Study Although this research has reached it aims, there were some unavoidable limitations. One of the limitations identified in this study is that there are some variables that are found useful by another researcher to use in this study such as interest rates and investment but because of the data of those variables in Malaysia itself are unavailable, hence these variable are not to be taken into consideration. Another limitation of this study is the number of units that were used in this study is too small, and sometimes it is difficult to find significant relationships from the data, as the statistical tests sometimes required a larger sample size to ensure the distribution of the population and to be considered representative of groups of people to whom results will be generalized. Apart of that, in this research, the research about this exchange rate is still smaller where in this research, the researcher found only some articles that study about this factors that affected exchange rate in Malaysia while most of the research of the case study about exchange rate is based on another ASEAN countries. Therefore, it is recommend that future research should made more research about this exchange rate but must include another variables such as investment or using the panel data.
