Investigating the causal relationship between exchange rate variability and palm oil export: evidence from Malaysia based on ARDL and nonlinear ARDL approaches

Lee, Kam Weng and Masih, Mansur (2018): Investigating the causal relationship between exchange rate variability and palm oil export: evidence from Malaysia based on ARDL and nonlinear ARDL approaches.

Abstract

Exchange rate is seen as an important economic variable that affects Malaysia’s palm oil export, which the policy maker may interfere in order to ensure that it maintains its position as one of the major palm oil exporters in the world. Nevertheless, the lead-lag relationship between exchange rate and palm oil export is unclear. Similarly, it is unclear whether there exists a long run asymmetric relationship between exchange rate and palm oil export. Therefore, this study aims to investigate the lead-lag relationship between exchange rate variability and palm oil export in Malaysia and whether the relationship between the two is linear symmetric or otherwise. This study employs ARDL, VECM and VDC techniques and further extends the previous research by adopting a recent technique which is Non-linear ARDL (NARDL) by using the data extracted over the period of 2008:1 to 2017:12 from Malaysian Palm Oil Council and DataStream. Based on this study, it is found that exchange rate is the exogenous variable, while palm oil export is the endogenous variable. Further, there exists a long run asymmetric relationship between exchange rate and palm oil export. Based on such findings, it is important to note that although the exchange rate is the most exogenous variable, policy maker could, to some extent, interfere in the exchange rate regime to manipulate the palm oil export and the policy maker should take into consideration the nonlinear asymmetric relationship between them in designing a suitable policy.

• Item Type: MPRA Paper
• Language: English
• Keywords: Exchange rate, palm oil export, Malaysia, ARDL, NARDL
• Subjects: C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; C - Mathematical and Quantitative Methods > C5 - Econometric Modeling > C58 - Financial Econometrics; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Adam, P., Rosnawintang, R., & Tondi, L. (2018). The causal relationship between crude oil price, exchange rate and rice price. International Journal of Energy Economics and Policy, 8(1), 90-94.

Ahmad Borhan & A Nordin (2010). Effective Exchange Rate Effects on Exports of Oil Palm Products to Selected Markets. Oil Palm Industry Economic Journal, 10(1), 26-34.

Alias, M., & Tang, T. C. (2005). Supply response of Malaysian palm oil producers: impact of interest rate variations. Oil Palm Industry Economic Journal, 5(2), 11-22.

Aliyu, S.R.U. (2011). Impact of oil price shock and exchange rates volatility on economic growth in Nigeria: An Empirical Investigation. Research Journal of International Studies, 11(3): 103 – 120.

Amna Awad Abdel Hameed and Fatimah Mohamed Arshad (2009). The impact of petroleum prices on vegetable oil prices: Evidence from cointegration tests, Oil Palm Industry Economic Journal, 9(2), 1 -40.

Aprina, H. (2014). The Impact of Crude Palm Oil Price on Rupiah’s Rate. Buletin Ekonomi Moneter dan Perbankan, 16(4), 295-314.

Asari, F. F. A. H., Rahman, N. H. A., Razak, E. A. A., Ahmad, B. A. S., Harun, N. F. A., & Jusoff, K. (2011). A time series analysis of the relationship between total area planted, palm oil price and production of Malaysian palm oil. World Applied Sciences Journal, 12, 34-40.

Basiron, Y. (2002). Palm oil and its global supply and demand prospects. Oil palm industry economic journal, 2(1), 1-10.

Bostan, I., & Firtescu, B. N. (2018). Exchange Rate Effects on International Commercial Trade Competitiveness. Journal of Risk and Financial Management, 11(2), 19-28.

Chizari, A., Mohamed, Z., Shamsudin, M. N., & Seng, K. W. K.(2017). Economic Climate Model of the Oil Palm Production in Malaysia. International journal of Horticulture, Agriculture and Food science, 1(3), 25 -37.

Fang, W., Lai, Y., & Miller, S. M. (2009). Does exchange rate risk affect exports asymmetrically? Asian evidence. Journal of International Money and Finance, 28(2), 215-239.

Hasan, J., Muktadir-Al-Mukit, D., & Islam, F. (2015). Impact of exchange rate volatility on the export performance of developing countries: Evidence from bilateral trade between Bangladesh and the US, Journal of International Business and Economy, 16(2), 21-39.

Mahmood. I, Ehsanellah, M. & Ahmed, H. (2011). Exchange Rates Volatility and Macroeconomic Variables in Pakistan. Business Management Dynamics, 1(2), 11-22

Ming, K. K., & Chandramohan, D. (2002). Malaysian palm oil industry at crossroads and its future direction. Oil Palm Industry, Economic Journal, 2(2), 10-15.

Oluyemi, O., & Isaac, E. D. (2017). The Effect of Exchange Rate on Imports and Exports in Nigeria from January 1996 to June 2015. International Journal of Economics and Business Management, 3(3), 23 – 35.

Prasetyo, A., & Marwanti, S. (2017). The Influence of Exchange Rate on CPO Exports of Indonesia. Jurnal Ekonomi Pembangunan: Kajian Masalah Ekonomi dan Pembangunan, 18(2), 159-174.

Rezitis, A. N. (2015). The relationship between agricultural commodity prices, crude oil prices and US dollar exchange rates: A panel VAR approach and causality analysis. International Review of Applied Economics, 29(3), 403-434.

Talib, B. A., & Darawi, Z. (2002). An economic analysis of the Malaysian palm oil market. Oil Palm Industry Economic Journal, 2(1), 19-27.

Teoh, P. S., Chin, L. B., Fong, W. L., Yue, H. K., & Tan, Z. Y. (2014). Asymmetric adjustment between crude oil and commodity market: Evidence from corn, soybeans, palm oil, wheat and sugar, Doctoral Group Dissertation, Department of Finance and Banking, University Tuanku Abdul Rahman, Malaysia.

Zakaria, Z. (2013). The relationship between export and exchange rate volatility: Empirical evidence based on the trade between Malaysia and its major trading partners. Journal of Emerging Issues in Economics, Finance and Banking, 2(2), 668-684.