The purpose of this paper is to examine the impact of real exchange rate misalignment on economy and economic sectors, namely construction, manufacturing and mining and quarrying in Malaysia.
The equilibrium real exchange rate and economic models are estimated using the autoregressive distributed lag approach.
An increase in productivity differential or reserve differential will lead to an appreciation of real exchange rate in the long run. An increase in positive (negative) real exchange rate misalignment will lead to an increase (decrease) in economy. An increase in long-run real exchange rate misalignment will lead to a decrease in economy. Real exchange rate misalignment or long-run real exchange rate misalignment can influence the manufacturing sector in Malaysia. More specifically, undervaluation will promote whereas overvaluation will hurt the manufacturing sector.
Real exchange rate misalignment can be a policy to influence economy but may not be the best choice.
