Exchange rate and interest rate differential: the case of the Malaysian Ringgit/US Dollar

The paper tests for the systematic empirical relationship between the Malay sian Ringgit/US Dollar real exchange rate and the real interest rate differ ential between Malaysia and the US using the Johansen maximum likelihood co integration procedure. The results indicate the existence of a fairly robus t long-run relationship between the real exchange rate and the real interes t rate differential. The estimated error correction models also indicate th e existence of stable adjustment dynamics when either the real exchange rat e or the real exchange rate differential deviates from their long-run equil ibrium position.