Managing the Impossible Trinity: The Case of Malaysia

This paper discusses how Malaysia manages the impossible trinity, the conjecture that a country cannot simultaneously maintain an open capital account, an exchange rate stability and monetary policy independence. Only two out of these three goals can be mutually consistent and policy makers have to decide which third goal to give up. The paper shows how Malaysia adopts an intermediate regime -- a regime that enables policy makers to manage all the three goals simultaneously. The impact of the global financial crisis on the Malaysian economy and the policy options for Malaysia to deal with the recent huge capital outflows are discussed in this paper. The willingness by Bank Negara Malaysia to allow a certain extent of exchange rate adjustments in the face of current global crisis reflects that Malaysia is not exempted from the impossible trinityImpossible Trinity, Malaysia, Global Financial Crisis

Malaysia’s Outward FDI: The Effects of Host Market Size and Home Government Policy

This study estimates the possible determinants of outward FDI from Malaysia by introducing host market size and home government policy on capital outflows using multivariate cointegration and error-correction modeling techniques. The empirical results indicate that there is a positive long-run relationship between Malaysia’s outward FDI and its key determinants, viz. foreign market size, real effective exchange rate, international reserves and trade openness. In order to capitalize on globalization, the main findings suggest that apart from the market-seeking incentive and the adoption of outward-oriented policies, the Malaysian government could also encourage outward FDI by implementing liberal policy on capital outflows. However, this can pose a dilemma to the economy. On one hand, encouraging FDI outflows may tend to retard domestic investment seeing that it has been an important source of economic growth over the last three decades. On the other hand, restricting FDI outflows could discourage potential Malaysian multinational corporations from seizing opportunities abroad and to become regional and international players in the long run. The present study has important policy implications for the country’s economic development and the internationalization of Malaysian firms in the era of globalization.Outward FDI, Malaysia

Outward FDI, merchandise and services trade: evidence from Singapore

This paper aims to explore the causality pattern between OFDI and major external trade components (i.e. exports and imports of merchandise as well as services) using Singapore as a case, since it is one of the largest outward investors in the Asian region, and is overtly trade-dependent. The findings reveal that there is evidence of OFDI-led trade hypothesis, particularly, merchandise exports and imports, an indication for OFDI to open up important channels for intra-firm trade activities, home country sourcing and backward integration. However, there is no evidence of causality relationships between Singapore’s OFDI and services trade because the nature of services is mainly to provide market presence in the consuming country. As such, Singaporean multinationals are likely to outsource their services either from the host country services sector or their own services-supporting subsidiaries that have been relocated abroad. The present study provides implications for policy formulation on strengthening the OFDI-services trade linkages.Outward FDI, multinationals, Singapore, Granger causality, merchandise and services trade

Is Productivity Linked To Wages? An Empirical Investigation in Malaysia

This study investigates the relationship between real wages, labor productivity and unemployment in Malaysia at the macroeconomic level, using time-series econometric techniques. The study found a long-term equilibrium relationship between labor productivity and real wages, but that unemployment was apparently unconnected to the system. The results suggested that labor productivity is positively related to real wage in the long run. However, the increase in real wage exceeds the increase in labor productivity causing an increase in unit labor cost. In addition, the study found a positive causal flow from productivity to wages in the short-run supporting the marginal productivity theory

Managing The Trilemma: The Case of Malaysia

This paper discusses how Malaysia manages the trilemma, the conjecture that a country cannot simultaneously maintain an open capital account, an exchange rate stability, and monetary policy independence. Only two out of these three goals can be mutually consistent and policy makers have to decide which third goal to give up. The paper shows how Malaysia adopts an intermediate regime – a regime that enables policy makers to manage all the three goals simultaneously. The impact of the global financial crisis on the Malaysian economy and the policy options for Malaysia to deal with the recent huge capital outflows are discussed in this paper. The willingness by Bank Negara Malaysia to allow a certain extent of exchange rate adjustments in the face of current global crisis reflects that Malaysia is not exempted from the trilemma.

Managing the Impossible Trinity: The Case of Malaysia

This paper discusses how Malaysia manages the impossible trinity, the conjecture that a country cannot simultaneously maintain an open capital account, an exchange rate stability and monetary policy independence. Only two out of these three goals can be mutually consistent and policy makers have to decide which third goal to give up. The paper shows how Malaysia adopts an intermediate regime -- a regime that enables policy makers to manage all the three goals simultaneously. The impact of the global financial crisis on the Malaysian economy and the policy options for Malaysia to deal with the recent huge capital outflows are discussed in this paper. The willingness by Bank Negara Malaysia to allow a certain extent of exchange rate adjustments in the face of current global crisis reflects that Malaysia is not exempted from the impossible trinit

Outward FDI, merchandise and services trade: evidence from Singapore

This paper aims to explore the causality pattern between outward foreign direct investment (OFDI) and major external trade components (i.e. exports and imports of merchandise as well as services) using Singapore as a case study, since it is one of the largest outward investors in the Asian region and it is overtly trade-dependent. The findings reveal that there is evidence of an OFDI-led trade hypothesis, particularly with regard to merchandise exports and imports, which is an indication OFDI opens important channels for intra-firm trade activities, home country sourcing and backward integration. However, there is no evidence of causality relationships between Singapore's OFDI and services trade because the purpose of such services is mainly to provide a market presence in the consuming country. As such, Singaporean multinationals are likely to outsource their services either from the host country services sector or from their own services-supporting subsidiaries that have been relocated abroad. The present study provides implications for policy formulation to strengthen OFDI-services trade linkages

Exchange rate management: the case of Malaysia

This paper sought to examine whether Purchasing Power Parity (PPP) can become a predictor model for exchange rate. We try to determine whether at least some variant of the PPP-oriented rule may be used in Malaysia as a basis for exchange rate policy. Two methods are used to examine whether long run PPP ho1ds. The first method is testing whether or not the real exchange rate fol1ows a random walk. The second is the Johansen procedure to test for a long-run relationship between real exchange rate and real economic shocks. It is found that the ringgit real exchange rate-follows a random walk, which means PPP does not hold. However, supportive evidence is also seen that there is a long-run relationship between ringgit real exchange rate with current account balance and government spending. The policy implication of this important finding is that some variant of the PPP-oriented rule may be used in Malaysia as a basis for exchange rate policy. Government spending and current account balance can be used as a guide to determine the movement of real exchange rate. The error-correction model shows that real exchange rate, government spending and current account all adjusted to long-run equilibrium. It has a very important policy implication. Fiscal policy, which controls government expenditure, can be used as a tool to manage exchange rate. Measures have to be taken to increase export while at the same time import has to be reduced to maintain the current account balance to be in surplus. This will strengthen the ringgit, thus helping to stabilize the ringgit exchange rate

Causality between government revenue and expenditure in Malaysia: A seasonal cointegration test

The objective of this article is to empirically incorporate the effect of seasonality in examining the causal relationship between quarterly government revenue and governemnt expenditure in Malaysia for the period 1970.1- 1994.4. The seasonal integration and cointegration tests developed by Hylleberg, Engle, Granger and Yoo (1990) and extended by Engle, Granger, Hylleberg and lee (1993) are applied prior to determination of causality. Evidence of seasonal cointegration of biaanual frequency is found

Causality between government revenue and expenditure in Malaysia: A seasonal cointegration test

The objective of this article is to empirically incorporate the effect of seasonality in examining the causal relationship between quarterly government revenue and governemnt expenditure in Malaysia for the period 1970.1- 1994.4. The seasonal integration and cointegration tests developed by Hylleberg, Engle, Granger and Yoo (1990) and extended by Engle, Granger, Hylleberg and lee (1993) are applied prior to determination of causality. Evidence of seasonal cointegration of biaanual frequency is found