The dynamics of growth, exports, exchange rate and foreign direct investment: evidence from Malaysia

The paper analyzes dynamic interactions among four macroeconomic variables, namely real gross domestic product (GDP), real exports, real exchange rate and foreign direct investment (FDI) for the Malaysian case using standard time series techniques. Malaysia’s GDP seems to be more driven by changes in exports and exchange rate, while FDI plays an insignificant role towards economic growth. We observe that there is a stable long run relationship among economic growth, real exports, real exchange rate and FDI. The empirical results show that the real exchange rate and real exports are found to have significant impact on real GDP in Malaysia. We also note that the real exchange rate is the most exogenous variable in the long run, while the FDI is the weakest endogenous variable in the dynamic interaction. Despite exchange rate being the most exogenous, as far as the GDP is concerned, more of the variation is explained by real exports.The model suggested that real exchange rate is the most exogenous variable, implying that exchange rate policies should be considered as a policy instrument to bolster economic growth. Exchange rate will also have an indirect impact on the economic growth through real exports by making exports more price-competitive. As a whole, policy makers should weigh in the dynamic interactions among the macroeconomic variables before implementing policy instruments to stimulate economic growth.