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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.

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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.

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