EXCHANGE RATE STABILITY AND FISCAL DISCIPLINE – EMPIRICAL EVIDENCE ON MALAYSIAN RINGGIT

Abstract

Fiscal discipline represents a fundamental economic condition for promoting a more equitable economic environment. Although previous research has identified a complex relationship between government fiscal policy and living standards, several studies emphasise the role of fiscal discipline in supporting economic stability and equitable development. Nevertheless, the extent to which public finance improves living standards through domestic currency stability remains inconclusive. Against this background, the present study examines whether changes in Malaysian government revenue influence the value of the Ringgit exchange rate over time. The Malaysian Ringgit has strengthened against the US dollar since 2023, making it particularly relevant to investigate the underlying factors contributing to its appreciation over the past 18 years. The study adopts the Keynesian framework as its theoretical foundation and uses annual secondary data obtained from the World Bank database for the period from 2008 to 2025. For empirical estimation, the study employs the Johansen-Juselius cointegration technique alongside the Engle-Granger Cointegration (EG) test. The empirical findings indicate the existence of a significant long-run relationship between total government revenue and the Ringgit exchange rate. A similar long-run relationship is also identified between government debt and the exchange rate. However, in the short run, total government revenue does not Granger-cause movements in the Ringgit exchange rate. The policy implications suggest that credible public finance is crucial for promoting an equitable economic environment and sustaining long-term economic growth. The findings indicate that increases in total government revenue are associated with an appreciation of the domestic currency against major international currencies. Fiscal discipline can signal the government's capacity to control inflation and minimise the risk of sovereign debt default, thereby strengthening market confidence. Greater fiscal credibility may subsequently encourage foreign capital inflows and increase demand for the domestic currency. In turn, a stronger domestic currency can protect consumers' purchasing power and contribute to sustained long-term economic growth.