Munich Personal RePEc Archive

Trade Balance, Foreign Exchange and Macroeconomic Impacts: An Empirical Assessment for China and Malaysia

Chan, Tze-Haw (2014): Trade Balance, Foreign Exchange and Macroeconomic Impacts: An Empirical Assessment for China and Malaysia.

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Abstract

China appears as the biggest trading partner for ASEAN economy but it is inconclusive whether the complementarities between China and regional economies offset China’s competitive threat. We assess if real exchange fluctuations and the demand-supply channels determine the Malaysia-China trade balances in the global crises era, 1997-2010. The findings reveal that despite the long run effect of real exchange on trade balances, the Keynesian demand channel was not uphold during and after the global financial crisis – due to the contractionary effect on Malaysian output. Currency devaluation for exports gains is insufficient to sustain Malaysia output expansion against China. Further productivity growth in real and tradable sectors is essentially needed. Meanwhile, the Chinese inflation impact is not evident following the foreign exchange shock and, the study generally supports the complementary role of China in the Malaysia-China bilateral trading.

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