Monday, February 15, 2016

MYR Nominal and Real Effective Exchange Rate Indexes

I’ve been reworking my MYR exchange rate indexes, with the idea that I might put them out as a public service. There’s no official effective exchange rate indexes for the Ringgit, though there are many unofficial ones, on top of the indexes published by the IMF and the BIS. I’ve never been happy with any of them, mainly due to either a lack of documentation or the somewhat biased construction some of them have.

So here’s my version, based largely on international best practice (where I diverge is in using quarterly weights, instead of annual weights). There're six indexes altogether, comprising a broad 16 currency index, a more narrow 5 currency index of Malaysia's top trading partners, and an ASEAN index, with nominal and real versions for each.

I’m hoping to have these updated by the 7th of each month, though I can’t promise to meet that service level standard regularly. I’m hoping to follow this up with a technical document describing the construction of the indexes and data sources, as well as a running change log. The indexes aren’t perfect by any means, but the best I can come up with.

To access the data, click the permanent link on the top right of this blog post (“MYR Nominal and Real Effective Exchange Rates”), or click here.


  1. May Allah bless your great effort, sir.

  2. TQ Sir. What if CPI is understated, will it distort the MYR REER? Again, many thanks Sir.

    1. @Reader

      Yes and no. Remember that the nominal exchange rates are deflated by the CPIs of each currency pair, not the home currency alone. If both understate inflation, there should be minimal distortion. If only one is out of sync, then the measurement distortion would be greater.

      However, if you look at the literature on CPIs, it is far more likely to overstate, not understate, inflation. IIRC, DOS doesn't apply hedonic adjustments to the Malaysian CPI, which means its probably too high.

    2. Dear Sir, is the Hedonic method relevant here? My thesis was on Hedonic pricing of PC's. Yes on a quality adjusted basis, it has improved as in the case of PC speed etc, it has become standard du jour.

      But is the hedonic method the right reference?

    3. @Reader

      It's not really my field, so you'd probably know better than I. However, other attempts at measuring prices (e.g. the Billion Prices Project, Retail Price Indexes, Personal Consumption Deflators etc) suggest that the CPI isn't all that wrong.

      Take for example the massive deflationary impact that China has had on tradeable goods prices over the past decade, or the drop in oil and other commodity prices over the past two years. I don't think the CPI is overstating inflation.

      But what I think you're getting at here is whether the CPI measures the cost of living accurately, and on that score the answer is no. The issue is that the CPI is intended to measure the prices of consumables only, and doesn't cover expenditure on capital items such as housing (cars are taken as consumables) or other asset markets, which are conceptually different.

      In any case, the choice and construction of deflators doesn't affect REERs very much. Using different deflators (WPI or PCE) results in very nearly the same series. Weighting schemes are much, much more important.

    4. Oh, and please don't call me sir