Purpose-This study is to examine the dynamic relationship among macroeconomic variables such as gross domestic product (GDP), foreign exchange rate (forex), inflation rate and interest rate, which are instrumental in the assessment of macro stability and economic performance in a small and open economy (SOE) like Malaysia. Design/methodology/approach-The analysis method embraced in the present study are Unit Root Test, Co-integration Test, Vector Error-Correction Modeling (VECM), Impulse Response Function (IRF), and Variance Decomposition. Findings–The analysis discovers the presence of long run relationship among the macroeconomic variables at different signs and magnitudes. A positive relationship was found between GDP and forex (RM/USD), while a negative relationship was identified among GDP-inflation and GDP-interest rates. In the short run, changes in macroeconomic variables have led to similar patterns of behavior with the effects differing mainly in terms of shock adjustments. Dynamic causal effects have also been detected among the macroeconomic variables.

Practical implications–The study improves existing frame of knowledge with the fresh insights on the dynamic relationship among the GDP, forex, inflation rate and interest rate. The empirical evidence provides the supports for the export-led growth paradigm and finance-led growth hypothesis. In addition, monitoring the macro stability and foreign shocks (via forex) are essential in sustaining the economic performance of Malaysia. Originality/value-The outcomes of the existing study deliver some treasured understandings and numerous significant implications on Malaysia macroeconomic assessment.