The Analyzing and measuring the impact of the reciprocal relationship between exchange rates and interest rates on the market value of Malaysia from (2000-2020)

Abstract

This study aims to demonstrate the impact of the reciprocal relationship between the exchange and interest rates on the Malaysian financial markets for the period (2000-2020) using the structural autoregressive vector model, through analyzing and measuring the relationship between the exchange and interest rates to show their impact on the market value index of the financial markets. This study relied on estimating the standard model of the reciprocal relationship of exchange and interest rates and the variables affecting them, including gross domestic product growth, inflation, and broad money supply. The model of the capital market index as a dependent a variable and the exchange rate and interest variables as independent variables, as the model includes the effects of the interest rate and the exchange rate. The SVAR model was used to test the long-term relationship between the study variables, in addition to the analysis of impulse response function (IRF) and the analysis of variance decomposition (VD) to test future shocks in the short and long terms. According to these analyses, the study concluded that the relationship between the exchange rate and interest according to Malaysian data was significant in one direction, from the exchange rate to the interest rate, as it was found that there is a negative relationship between the interest rate on deposits and the real effective exchange rate. While the impact of the reciprocal relationship between the exchange rates and interest rates was positive and direct on the capital market index, as any increase or decrease in the two variables leads to the same effect and shock on the market value index.