Sectoral Effects of Ringgit Depreciation Shocks
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The paper seeks to address two important questions-namely, is exchange rate depreciation expansionary or contractionary and are there distributional consequences of exchange rate shocks for the case of Malaysia? In the paper, we consider the relations between aggregate output as well as eight sectoral outputs and real effective exchange rate in multivariate setting. Applying multivariate cointegration test, we find evidence for cointegration among the variables for all sectors. More importantly, both real output (aggregate output as well as all sectoral output) and real exchange rate contribute significantly to the cointegration space, affirming the presence of long run relations between the two focused variables. In most cases, the estimated cointegrating vectors suggest expansionary currency depreciation. Our simulated dynamics using generalized impulse responses further substantiate this finding especially over longer horizons. Over shorter horizons, however, exchange rate depreciation can be contractionary for certain sectors particularly for the construction sector. Lastly, we also find evidence indicative of the differential effects of the currency shocks. Comparatively, the manufacturing sector, transport, storage and communication sector, and finance, insurance, real estates and business services sector seem to be affected more by exchange rate fluctuations.
Abstract
The paper seeks to address two important questions-namely, is exchange rate depreciation expansionary or contractionary and are there distributional consequences of exchange rate shocks for the case of Malaysia? In the paper, we consider the relations between aggregate output as well as eight sectoral outputs and real effective exchange rate in multivariate setting. Applying multivariate cointegration test, we find evidence for cointegration among the variables for all sectors. More importantly, both real output (aggregate output as well as all sectoral output) and real exchange rate contribute significantly to the cointegration space, affirming the presence of long run relations between the two focused variables. In most cases, the estimated cointegrating vectors suggest expansionary currency depreciation. Our simulated dynamics using generalized impulse responses further substantiate this finding especially over longer horizons. Over shorter horizons, however, exchange rate depreciation can be contractionary for certain sectors particularly for the construction sector. Lastly, we also find evidence indicative of the differential effects of the currency shocks. Comparatively, the manufacturing sector, transport, storage and communication sector, and finance, insurance, real estates and business services sector seem to be affected more by exchange rate fluctuations.
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