1 EMPIRICAL EXAMINATION OF RINGGIT (RM) EQUILIBRIUM EXCHANGE RATE AND MISALIGNMENT Noor Zahirah Mohd Sidek and Mohammed B. Yusoff ABSTRACT Following the reinstatement to managed float exchange rate regime in July 2005, the real effective exchange rate (REER) of ringgit has been fluctuating, albeit, slightly, which raises the question whether the current trend is consistent with the economic fundamentals. This paper ascertained the degree of misalignment of the ringgit in a tractable framework by estimating the long run equilibrium real effective exchange rate of the currency. Based on Johansen vector cointegration technique, we conclude that the ringgit fluctuates around its long run equilibrium after the 1997 crisis and misalignments are eliminated over a relatively short period. We identify productivity, government consumption expenditure and trade openness as important explanatory variables of the ringgit’s long run equilibrium value. Results suggest that Malaysia’s exchange rate policy may play significant role towards the improvement in exports and, to some extent, the current depreciation which takes place since the 1997 crisis can be viewed as an equilibrium phenomenon. Field of Research: International Economics, Macroeconomics 1. Introduction With the recent sub-prime mortgage crisis in the US that precipitate into a worldwide banking crisis, the global phenomenon of high food prices and volatile commodity prices; the contentious question of ‘is the currency misaligned?’ has again become relevant. Kaminsky et al. (1998) suggest that overvalued currency is one of the leading indicators of incoming crisis. ______________ Noor Zahirah Mohd Sidek, Kulliyah of Economics and Management Sciences (KENMS), International Islamic University,Malaysia. email: noor_zahirah@yahoo.com Prof. Dr. Mohammed b. Yusoff, KENMS, International Islamic University, Malaysia. email: mohammed.yusoff@iiu.edu.my