Malaysia: how much exchange rate misalignment is detrimental to exports?

The purpose of this paper is to estimate an approximate threshold point at which exchange rate misalignment begins to deter exports. Based on the threshold autoregressive model, the sample is segregated into two regimes where the threshold point is unknown. The regimes are divided into low misalignment and high misalignment regimes. The estimated threshold point is 8 percent. Results show that below 8.88 percent, misalignment in terms of overvaluation has no statistically significant effect on exports. Misalignment in terms of overvaluation only affects exports in a negative manner when it is more than 8.88 percent. An important policy implication inferred from this study is that overvaluation of the exchange rate should be kept below 8.88 percent to ensure a conducive exchange rate environment for exports.