Impact of exchange rate shock on prices of imports and exports

Duasa, Jarita (2008): Impact of exchange rate shock on prices of imports and exports.

Abstract

This study examines the significant impact of exchange rate shock on prices of Malaysian imports and exports. In methodology, the study adopts vector error correction (VECM) model using monthly data of nominal exchange rates, money supply, prices of imports and prices of exports covering the period of M1:1999 to M12:2006. For further analysis, we adopt an innovation accounting by simulating variance decompositions (VDC) and impulse response functions (IRF). VDC and IRF serve as tools for evaluating the dynamic interactions and strength of causal relations among variables in the system. In fact, IRF is used to calculate the exchange rate pass-through on import prices and export prices. The findings indicate that, while the exchange rate shock is significantly affect the fluctuation of import prices, the degree of pass-through is incomplete.

• Item Type: MPRA Paper
• Language: English
• Keywords: Import prices; Export prices; VECM; Impulse Response; Variance Decomposition
• Subjects: E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E30 - General; C - Mathematical and Quantitative Methods > C2 - Single Equation Models ; Single Variables > C22 - Time-Series Models ; Dynamic Quantile Regressions ; Dynamic Treatment Effect Models ; Diffusion Processes; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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