Yan Wah Low - Graduate School of Business, Universiti Sains Malaysia, Penang, Malaysia
Tze-Haw Chan - Graduate School of Business, Universiti Sains Malaysia, Penang, Malaysia

Being a small and open economy (SOE), Malaysia has been export oriented and liberal to foreign capital investment but at the same time, exposed to global uncertainties and foreign exchange (forex) volatilities. This study examines the dynamic relationship among macroeconomic variables such as industrial production (proxy for economic performance), forex, inflation rate and interest rate, which are instrumental in the assessment of macro stability and economic performance. Through a series of econometric analyses on monthly data, we discover the presence of longand short-run relationships among the variables at different signs and magnitudes. In long run, a positive nexus was identified for GDP-forex (RM/USD), while negative links were found for GDP-inflation and GDP-interest rates. In the short run, changes in macroeconomic variables have led to similar patterns of behavior with significant effects differing mainly in terms of shock adjustment. Dynamic causal effects were also being detected among the variables. To sum up, monitoring the macro stability and foreign shocks (via forex) are essential in sustaining the economic performance of Malaysia.

Small and Open Economy (SOE), Macro stability, Economic Performance, Foreign Exchange Policy, Shock Adjustment