AN EMPIRICAL EVIDENCE ON THE IMPACT OF REAL EFFECTIVE EXCHANGE RATE ON TRADE BALANCE
DOI:
https://doi.org/10.51200/mjbe.vi.2881Keywords:
Ntrade balance, real effective exchange rate, Marshall-Lerner condition, J-curve phenomenon, co-integration, MalaysiaAbstract
This study aimed to examine whether the real effective exchange rate has an impact on trade balance in short run and long run, as well as to investigate if the Marshall-Lerner condition and J-curve phenomenon is satisfied by the variables in Malaysia from 2010 until 2019. Monthly data was used where the dependent variable was trade balance and the independent variable was real effective exchange rate. Several econometric models are applied including the Johansen co-integration to investigate long run relationship and Marshall-Lerner condition estimation, VECM model to investigate short run relationship estimation and impulse response test for J-curve phenomenon estimation. The findings revealed that there was long run relationship between the variables and there was existence of Marshall-Lerner condition. Meanwhile, there was no short run relationship between the variables and J-curve phenomenon was not satisfied in this study. This could be due to devaluation of real effective exchange rate where will help to improve the trade balance in the long run but give a negative effect in the short run which not followed the J-curve pattern. Hence, the Malaysia government should take high concern of exchange rate policy as well as monetary and fiscal policy in order to help stimulate the exports and reduce the inflationary pressure due to devaluation of exchange rate.
References
Adznan S., and Mansur M. (2018). Exchange rate and trade balance linkage: evidence from Malaysia based on ARDL and NARDL. MPRA Paper No. 91509, posted 17 Jan 2019. University Library of Munich, Germany.
Ahmad N., Ahmed R., Khoso I., Palwishah R., and Raza U. (2014). Impact of exchange rate on balance of payment: an investigation from Pakistan. Research Journal of Finance and Accounting, 5(13):32 -42.
Ali D. A. et al. (2014). The Effect of Exchange Rate Movements on Trade Balance: A Chronological Theoretical Review. Hindawi Publishing Corporation, Economics Research International.
Anderson A. (2010). How Does a Depreciation in the Exchange Rate Affect Trade Over Time? Unpublished thesis, Jönköping University.
Anil K. L., and Thomas C. L. (2002). The J-Curve: Evidence from East Asia. Journal of Economic Integration 17(2), June 2002:397-415.
Arize A. C. (1994). Cointegration test of a long-run relation between the real exchange rate and the trade balance. International Economic Journal, 8:1–8.
Aziz N. (2008). The Role of Exchange Rate in Trade Balance: Empirics from Bangladesh. University of Birmingham, UK.
Baharumshah A. Z. (2001). The effects of exchange rate on bilateral trade balance: new evidence from Malaysia and Thailand. Asian Economic Journal, 15: 291–312.
Bahmani-Oskooee M. (1991). Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs? Economic Letters, 36(4): 403-407.
Bahmani-Oskooee, M. (2001). Nominal and real exchange rates of the Middle Eastern countries and their trade performances. Applied Economics, 33:89–96.
Bedi Guy Herve D. (2010). The Effects of Real Exchange Rate on Trade Balance in Cote d’Ivoire: Evidence from the Cointegration Analysis and Error-Correction Models. School of International Business and Management, Shanghai University. MPRA Paper No. 21810, posted 07 Apr 2010.
Benton C. (2019). Serial correlation definition. https://www.investopedia.com/terms/s/ serial-correlation.asp
Boyd D., Caporale G. M., and Smith R. (2001). Real exchange rate effects on the balance of trade: Cointegration and the Marshall– Lerner condition. International Journal of Finance & Economics, 6(3): 187–200.
Briguglio L. (1989). The impact of a devaluation on the Maltese trade balance with special reference to the price and income reversal effects. Applied Economics, 21:325–37.
Brown R. L., J. Durbin and J. M. Evan. (1975). Technique for testing the constancy of regression relationship over time, Royal Statistical Journal Series B 37:149–163.
Caves R. E., Frankel J. A., and Jones R. W. (1996). World Trade and Payments: An Introduction. HarperCollins Publishers Inc. New York, NY.
Dickey D. A., and Fuller W. A. (1979). Distribution of the Estimators for Autoregressive Time Series with a Unit Root. Journal of the American Statistical Association, 74(366) :427-431.
EViews 11 Help Topics. (2019). http://www.eviews. com/help/helpintro.html
Focus Economics. (2020). Trade Balance in Malaysia. https://www. focus-economics.com/ country-indicator/malaysia/trade-balance
Gafar J. (1981). Devaluation and the balance of payments adjustment in a developing economy: an analysis relating to Jamaica: 1954–72. Applied Economics, 13: 151–165.
Halicioglu F. (2008). The J-Curve Dynamics of Turkey: An Application of ARDL Model. Department of Economics, Yeditepe University, Turkey. MPRA Paper No. 6824, posted 15 August 2012, 13: 54 UTC.
Har W. M., Lee T. H., Chew K. M., and Goh H. S. (2014). Validity of Marshal Lerner Hypothesis: An Empirical Study on Malaysia-United States Trade Balance. Asian Research Journal of Business Management, 1(3).
Hatemi J. A. & Irandoust M. (2005). Bilateral Trade Elasticties: Sweden Versus Her Major Trading Partners. Available: www.arpejournal.com/ APREvolume3number2/Hatemi-J-Irandoust
Hayes A. (2020). Real Effective Exchange Rate – REER Definition. https://www.investopedia. com/terms/r/reer.asp
Hernan Rinco, C. (1999). Testing the short-and-long run exchange rate effects on trade balance: The case of Colombia. Borradores De Economia 003561, Banco De La Republica.
Himarios, D. (1989). Do devaluations improve the trade balance? The evidence revisited, Economic Inquiry, 27: 143–168.
Hooy C. W., and Chan T. H. (2008). Examining Exchange Rates Exposure, J-Curve and the Marshall-Lerner Condition for High Frequency Trade Series between China and Malaysia. MPRA Paper 10916, University Library of Munich, Germany.
Howitt R. E., Watson W. D., and Adams R. M. (1980). A Reevaluation of Price Elasticities for Irrigation Water. Water Resources Research 16 (1980): 623-8.
Hunegnaw F. B., & Kim S. (2017). Foreign exchange rate and trade balance dynamics in East African countries. The Journal of International Trade & Economic Development, DOI: 10.1080/09638199.2017.1327611.
Igue N. N., and Ogunleye T. S. (2014). Impact of real exchange rate on trade balance in Nigeria. African Development Review, 26(2):347– 358.
Jamilov R. (2011). J-Curve dynamics and the Marshall-Lerner condition: evidence from Azerbaijan. MPRA Paper No. 39272. The Central Bank of the Republic of Azerbaijan.
Kale P. (2001). Turkey’s Trade Balance in the Short and the Long Run: An Error Correction Modelling and Cointegration. The International Trade Journal, 15 (2001): 27-56.
Kapoor, A. G. & Ramakrishnan, U. (1999). Is there a J-curve? A new estimation for Japan. International Economic Journal, 13: 71–79.
Kenton W. (2020). Balance of Trade. https://www. investopedia.com/terms/b/bot.asp
Krueger, A. O. (1983). Exchange Rate Determination. Cambridge University Press, Cambridge.
Downloads
Published
How to Cite
Issue
Section
Total Views: 450
| 
Total Downloads: 430
