The IMF Working Papers series is designed to make IMF staff research available to a wide audience. Almost 300 Working Papers are released each year, covering a wide range of theoretical and analytical topics, including balance of payments, monetary and fiscal issues, global liquidity, and national and international economic developments.
Malaysia's local currency debt market is one of the most liquid public debt markets in the
world. In recent years, the growing share of nonresident holders of debt has been a source of
concern for policymakers as a reason behind exchange rate volatility. The paper provides an
overview of the recent developments in the conventional debt market. It builds an empirical
two-stage model to estimate the main drivers of debt capital flows to Malaysia. Finally, it uses
a GARCH model to test the hypothesis that nonresident flows are behind the observed
exchange rate volatility. The results suggest that the public debt market in Malaysia responds
adequately to both pull and push factors and find no firm evidence that nonresident flows cause
volatility in the onshore foreign exchange market.