The yen-dollar exchange rate and Malaysian macroeconomic dynamics

This paper empirically assesses the effect of the yen-dollar exchange rate on selected macroeconomic variables, namely, real output, price level, and money supply, for Malaysia. The results, which are based on a vector autoregressive framework, suggest that variations in the yen-dollar rate can have significant influences on Malaysia's macroeconomic variables. More specifically, the yen-dollar depreciation leads to contraction in real GDP and money supply. These results are fairly robust to alternative model specifications. We believe that, apart from providing important insights into the interactions between the yen-dollar rate and domestic macroeconomic variables, our results contribute to the debate on choice of exchange rate regimes for Malaysia.