Malaysia-EU Trade at the Industry Level: Is there an Asymmetric Response to Exchange Rate Volatility?

BAHMANI-OSKOOEE, Mohsen and Aftab, Muhammad (2016): Malaysia-EU Trade at the Industry Level: Is there an Asymmetric Response to Exchange Rate Volatility?

Abstract

A study in this journal that assessed the impact of exchange rate volatility on Malaysia-EU trade at commodity level used the linear ARDL approach of Pesaran et al. (2001) and did not find significant effects in most of the 81 Malaysian exporting and 66 importing industries. In this paper, we argue for asymmetric effects of exchange rate volatility on the same industries’ trades which implies using Shin et al.’s (2014) nonlinear ARDL approach. While we find short-run asymmetric effects of volatility in almost all industries, we find evidence of adjustment asymmetry in 17 exporting and nine importing industries. We also find significant impact or short-run cumulative asymmetry in 12 exporting and six importing industries. The most important finding is significant long-run asymmetric effects in 36 Malaysian exporting industries and 25 Malaysian importing industries. Clearly, trade flows react to an increased exchange rate volatility differently than to a decreased volatility.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate volatility; Asymmetry effects; Commodity trade; Malaysia; US; Nonlinear ARDL
• Subjects: F - International Economics > F1 - Trade; F - International Economics > F1 - Trade > F14 - Empirical Studies of Trade; F - International Economics > F3 - International Finance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Aftab, M., R. Ahmad, I. Ismail, and M. Ahmed (2016), “Does Exchange-Rate Uncertainty Matter in the Malaysia-E.U. Bilateral Trade? An Industry Level Investigation”, Empirica, 43, 461-485.

Apergis, N., and S. Miller (2006) “Consumption Asymmetry and the Stock Market: Empirical Evidence” Economics Letters 93, 337-342.

Arize, A. C., T. Osang, and D. J. Slottje (2000), “Exchange-Rate Volatility and Foreign Trade: Evidence from Thirteen LDCs,” Journal of Business and Economics Statistics 18, 10-17.

Bahmani-Oskooee, M. (1986), "Determinants of International Trade Flows: Case of Developing Countries," Journal of Development Economics, 20, 107-123.

Bahmani-Oskooee, M., and S. W. Hegerty (2007), “Exchange Rate Volatility and Trade Flows: A Review Article,” Journal of Economic Studies 34, 211-255.

Bahmani-Oskooee, M. and H. Fariditavana (2016), “Nonlinear ARDL Approach and the J-Curve Phenomenon”, Open Economies Review, Vol. 27, pp. 51-70.

Bahmani-Oskooee, M., H. Harvey, and M. Aftab (2016), “Asymmetry Cointegration and the J-Curve: New Evidence from Malaysia-Singapore Commodity Trade”, Journal of Economic Asymmetries, forthcoming.

Bussiere, M. (2013), “Exchange Rate Pass-through to Trade Prices: The Role of Nonlinearities and Asymmetries”, Oxford Bulletin of Economics and Statistics, 75, 731-758.

De Grauwe, P. (1988), "Exchange rate variability and the slowdown in growth of international trade", IMF Staff Papers, pp. 63-84.

Delatte, Anne-Laure and Antonio Lopez-Villavicencio (2012), “Asymmetry Exchange Rate Pass-Through: Evidence from Major Countries,” Journal of Macroeconomics, 34, 833-844.

De Vita, G., and A. Abbott (2004), “Real Exchange Rate Volatility and US Exports: An ARDL Bounds Testing Approach,” Economic Issues 9, 69-78.

De Vita, G. and K. S. Kyaw, (2008), “Determinants of Capital Flows to Developing Countries: A Structural VAR Analysis”, Journal of Economic Studies, Vol. 35, pp. 304-322.

Doganlar, M. (2002), “Estimating the Impact of Exchange Rate Volatility on Exports: Evidence from Asian Countries”, Applied Economics Letters, 9, 859-863.

Doroodian, K. (1999), “Does Exchange Rate Volatility Deter International Trade in Developing Countries?”, Journal of Asian Economics, 10, 465-474.

Durmaz, Nazif (2015), “Industry Level J-Curve in Turkey,” Journal of Economic Studies 42, 689-706.

Hajilee, Massomeh, and Omar M. Al-Nasser, (2014), “Exchange Rate Volatility and Stock Market Development in Emerging Economies”, Journal of Post Keynesian Economics, Vol. 37, pp. 163-180.

Halicioglu, F., (2007), “The J-Curve Dynamics of Turkish Bilateral Trade: A Cointegration Approach”, Journal of Economic Studies, Vol. 34, pp. 103-119.

Narayan, P.K., S. Narayan, B.C. Prasad, and A. Prasad, (2007), “Export-led Growth Hypothesis: Evidence from Papua New Guinea and Fiji”, Journal of Economic Studies, Vol. 34, pp. 341-351.

Peree, E. and A. Steinherr (1989), “Exchange Rate Uncertainty and Foreign Trade”, European Economic Review, Vol. 33, pp. 1241-1264.

Pesaran, M. H., Y. Shin, and R. J. Smith (2001), “Bounds Testing Approaches to the Analysis of Level Relationships,” Journal of Applied Econometrics 16:289-326.

Shin, Y., Yu, B. and Greenwood-Nimmo, M. (2014), "Modelling asymmetric cointegration and dynamic multipliers in a nonlinear ARDL framework", Festschrift in Honor of Peter Schmidt, Springer, pp. 281-314.

Wong, K. N.. and T. C. Tang, (2008) “The Effects of Exchange Rate Variablity on Malaysia’s Disaggregated Electrical Exports”, Journal of Economic Studies, Vol. 35, pp. 154-169.

Verheyen, F. (2013), “Interest Rate Pass-Through in the EMU-New Evidence Using Nonlinear ARDL Framework”, Economics Bulletin, Vol. 33, No 1, pp. 729-739.