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Lead-lag between exchange rates and trade balance: Malaysian evidence

Saupi, Nabil and Masih, Mansur (2018): Lead-lag between exchange rates and trade balance: Malaysian evidence.

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Abstract

This paper wants to investigate the lead-lag relationship between real effective exchange rate (ER) and trade balance taking Malaysia as a case study. This is to study whether the contrasting theoretical views on exchange rates and trade balance remain true in Malaysia. Rather than assuming the dependent and independent variables based on theory, the paper takes the approach of time series technique that let the data decide which variable is dependent and which is not. The standard time series techniques are applied for the analysis. The paper contributes to validating past literature with updated data on exchange rates and trade balance, further enhancing the economic meaning of each theoretical view based on the results obtained from the study. The major finding is that results confirm each theoretical view, however with a unique time frame parameter and better understanding of the economic landscape. This will help policy makers in having decisive factors in determining effective policies on exchange rate and trade balance for attaining economic growth.

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