Lead-lag between exchange rates and trade balance: Malaysian evidence

Saupi, Nabil and Masih, Mansur (2018): Lead-lag between exchange rates and trade balance: Malaysian evidence.

Abstract

This paper wants to investigate the lead-lag relationship between real effective exchange rate (ER) and trade balance taking Malaysia as a case study. This is to study whether the contrasting theoretical views on exchange rates and trade balance remain true in Malaysia. Rather than assuming the dependent and independent variables based on theory, the paper takes the approach of time series technique that let the data decide which variable is dependent and which is not. The standard time series techniques are applied for the analysis. The paper contributes to validating past literature with updated data on exchange rates and trade balance, further enhancing the economic meaning of each theoretical view based on the results obtained from the study. The major finding is that results confirm each theoretical view, however with a unique time frame parameter and better understanding of the economic landscape. This will help policy makers in having decisive factors in determining effective policies on exchange rate and trade balance for attaining economic growth.

• Item Type: MPRA Paper
• Language: English
• Keywords: lead-lag, exchange rate, trade balance, VECM, VDC
• 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; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; G - Financial Economics > G1 - General Financial Markets > G15 - International Financial Markets

References

Arize, A. C. (1994). Cointegration test of a long-run relation between the real effective exchange rate and the trade balance. International Economic Journal, 8(3), 1–9.

Aziz, N. (2008). The role of exchange rate in the trade balance empirics from Bangladesh, Birmingham, U.K. University Press.

Bahmani-Oskooee, M., & Alse, J. (1994). Short-run versus long-run effects of devaluation: Error correction modeling and cointegration. Eastern Economic Journal,20(4), 453–464.

Engle, R. F. & Granger, C. W. (1987). Cointegration and error correction: Representation, estimation and testing. Econometrica, 55, 251–276.

Dornbusch, R. & Fischer, S. (1981). Macroeconomics (3rd ed). New York: McGraw Hill.

Himarios, D. (1985). The effects of devaluation on the trade balance: A critical view and reexamination of Miles's new results, The Journal of International Money and Finance, 4(4), 553–563

Haynes, S. E., & Stone, J. A. (1982). Impact of the terms of trade on the U.S. trade Balance: A reexamination. The Review of Economics and Statistics, 64(4), 702–706.

Hatemi, J. A., & Irandoust, M. (2005). Bilateral trade elasticities: Sweden versus her major trading partners. American Review of Political Economy, 3(2), 38–50.

Kapetanios, G., Shin, Y., & Snell, A. (2003). Testing for a unit root in the nonlinear framework.Journal of Econometrics, 112(2), 359–379.

Liew, K. S., Lim, K. P., & Hussain, H. (2000). Exchange rate and trade balance: The experience of ASEAN countries. Journal of Management Sciences, 3, 15–18.

Miles, M. A. (1979). The effects of devaluation on the trade balance and the balance of payments: Some new results. Journal of Political Economy, 87(3), 600–620.

Nam, K., Pyun, C. S., & Arize, A. C. (2002). Asymmetric mean-reversion and contrarian profits: ANST-GARCH approach. Journal of Empirical Finance, 9, 563–588.

Ng,, Y., Har, Wai-Mun, & Tan, G. (2008). Real exchange rates and trade balance relationship: An empirical study of Malaysia. International Journal of Business and Management, 3(8), 130–137.

Onafowora, O. (2003). Exchange Rate and the Trade Balance in East Asia: Is there a J-Curve. Economic Bulletin, 5(18), 1–13.

Pascalau, R. (2007). Testing for a unit root in the asymmetric nonlinear transition framework. Working Paper, University of Alabama, Department of Economics, Finance and Legal Studies.

Rose, A. K. (1990). Exchange rates and trade balance: Some evidence from developing countries. Economics Letters, 34, 271–275.

Singh, T. (2002). India's trade balance: The role of income and exchange rates. Journal of Policy Modeling, 24(5), 437–452.

Sollis, R., Leybourne, S. J., & Newbold, P. (2002). Tests for symmetric and asymmetric nonlinear mean reversion in real exchange Rates, Journal of Money, Credit, and Banking, 34, 686–700.

Sun, C., & Chiu, Y. (2010). Taiwan's trade balance and exchange rate revisited. Applied Economics, 42(7), 917–922.

Wilson, P., & Tat, C. T. (2001). Exchange rates and the trade balance: The Case of Singapore, 1970 to 1996. Journal of Asian Economics, 12(1), 47–63