The determinant of exchange rate regime, timing of regime switch and the cost of abandonment

• Main Author: Sam, Yet Huat
• Format: Thesis
• Language: English; English
• Published: 2016
• Subjects: HG3810-4000 Foreign exchange. International finance. International monetary system
• Online Access: https://eprints.ums.edu.my/id/eprint/39317/1/24%20PAGES.pdf; https://eprints.ums.edu.my/id/eprint/39317/2/FULLTEXT.pdf; https://eprints.ums.edu.my/id/eprint/39317/
• Institution: Universiti Malaysia Sabah

The debate over the justification of regime switch on 2005 which involves the abandonment of fixed exchange rate regime in Malaysia has yet to be resolved. Furthermore, the effect of regime switch in Malaysia has yet to be widely examined under the empirical theory and methodology. Thus, a series of econometric methods were proposed in this study to examine the suitability of the exchange rate regime which is implementing in the context of Malaysia and ASEAN countries. First, multinomial model was carried out to examine the determinant of exchange rate regime in the context of ASEAN based on; (i) Optimum Currency Area theory; (ii), financial development view; and (iii), social-political view. Then, the threshold cointegration was taking place as the main empirical specification. Proxy of dependent variable was calculated based on the Frankel-Wei model (2008) as the index of flexibility of exchange rate regime in a country. Threshold values which were obtained from the threshold cointegration would be able to explain the suitable timing for regime switch to take place. Furthermore, Classification and Regression Tree method were employed to examine the regime switch timing at the context of ASEAN region. Last but not least, the cost of abandon from fixed exchange rate regime in Malaysia was examined through comparing the exchange rate pass through effect before and after the regime switch takes place. This study had employed two new variables which were, unanticipated money supply and unemployment rate. Besides, the findings from the study supported the theory of Optimum Currency Area. The proposed sequence of empirical methodology provided guideline for policy maker on how to make a decision on determining a suitable exchange rate regime in a nation.