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The relationship between exchange rate and trade balance: evidence from Malaysia based on ARDL and Nonlinear ARDL approaches

Razak, Najwa and Masih, Mansur (2018): The relationship between exchange rate and trade balance: evidence from Malaysia based on ARDL and Nonlinear ARDL approaches.

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Abstract

This paper is focused on the relationship between exchange rate (MYR/RMB) and trade balance. Malaysia is used as a case study. Share price, money supply and exports to China are used as control variables. ARDL and Nonlinear ARDL methods are used to test whether the relationship between exchange rate and trade balance is symmetric or asymmetric in the short and long run. The results tend to indicate that the variables are theoretically related as evidenced in their being cointegrated. Furthermore, the relationship between exchange rate and trade balance is evidenced to be symmetric in the short run but asymmetric in the long run. The Granger-causality test tends to indicate that exchange rate is an endogenous (dependent) variable driven by money supply followed by share price and trade balance. The findings contain strong policy implications.

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