Exchange Rate Misalignment, Volatility and Import Flows in Malaysia

Naseem, N.A.M and Tan, Hui-Boon and Hamizah, M.S (2008): Exchange Rate Misalignment, Volatility and Import Flows in Malaysia. Published in: Int. Journal of Economics and Management , Vol. 1, No. 3 (2009): pp. 130-150.

Abstract

This paper investigates the effect of real exchange rate misalignment and volatility on Malaysian import flows during 1991:Q1 to 2003:Q4. A measure of the quantitative proxy of the real exchange rate misalignment is constructed using the Natural Real Exchange Rate (NATREX) equilibrium model, whereas the volatility of real exchange rate is generated from the GARCH model. This paper differs from existing literature as the effects of exchange rate misalignment significantly hastened the level of Malaysian imports for period of the study. The empirical results also show that the exchange rate volatility has merely promoted the Malaysian imports during the crisis period. This suggests that the exchange rate misalignment and volatility are important determinants in inspiring Malaysian import flows, especially during the 1997 Asian financial crisis.

• Item Type: MPRA Paper
• Language: English
• Keywords: Real Exchange Rate Misalignment, Volatility, Asian Financial Crisis and ARDL Bounds Test
• Subjects: F - International Economics > F1 - Trade > F10 - General; F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

References

Arize, A.C. (1995) Trade Flows and Real Exchange-Rate Volatility: An Application of Cointegration and Error Correction Modeling, North American Journal of Economics and Finance, 6(1), 37 – 51.

Arize, A.C. (1997) Conditional Exchange Rate Volatility and the Volume of Foreign Trade: Evidence from Seven Industrialized Countries, Southern Economic Journal, 64, 235 – 54.

Arize, A.C. (1998) The Long-Run Relationship Between Import Flows and Real Exchange-Rate Volatility: The Experienced of Eight European Economies, International Review of Economics and Finance, 7, 417 – 435.

Baharumshah, A.Z., Thanoon, M.A. and Rashid, S. (2003) Savings Dynamic in the Asian Countries, Journal of Asian Economic, 13, 827 – 845.

Bailey, M.J. and Tavlas, G.S. (1988). Trade and Investment Performance under Floating Exchange Rates: The U.S. Experience. MF working Paper, 37

Baron, D.P. (1976) Fluctuating Exchange Rates and the Pricing of Exports, Economic Enquiry, 14, 425 – 438.

Belanger, D., Gutierrez, S., Racette, D. and Rayund, J. (1992) The Impact of Exchange Rate Variability on Trade Flows: Further Results on Sectoral U.S Imports from Canada. North American, Journal of Economics and Finance, 3, 888 – 92.

Bollerslev, T. (1986) Generalized Autoregressive Conditional Heteroscedasticity, Journal of Econometrics, 31, 307 – 327.

Bollerslev, T., Chou, R. and Kroner, K. (1992) ARCH Modeling in Finance, Journal of Econometrics, 52, 5 – 59.

Bouoiyour, J. and Rey, S. (2005) Exchange Rate Regime, Real Exchange Rate, Trade Flows and Foreign Direct Investments: The Case of Morocco, African Development Review, 17, 302 – 334.

Choudhry, T. (2005) Exchange Rate Volatility and the United States Export: Evidence from Canada and Japan, The Japanese and International Economies, 19, 51 – 71.

Cushman, D.U. (1988) U.S. Bilateral Trade Flows and Exchange Risk during the Floating Period. Journal of International Economics, 3, 17 – 330.

De Grauwe, P. (1988). Exchange Rate Variability and the Slowdown in Growth of International Trade. IMF Staff Papers, 35, 63 – 84.

Dickey, D.A. and Fuller, W.A. (1981) Likelihood Ratio Statistic for Autoregressive Time Series with a Unit Root, Journal of American Statistical Association, 74, 427 – 431.

Edwards, S. and Savastano, M. (1999) Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know? Working Paper No. 7228 (NBER).

Edwards, S. (2000). Exchange Rates Systems in Emerging Economies. Mimeo, January.

Elbadawi, I. and Soto, R. (1994) Capital Flows and Equilibrium Real Exchange Rates in Chile. Policy Research Working Paper 1306, The World Bank, Washington DC.

Engle, R. and Bollerslev, T. (1986) Modeling the Persistence of Conditional Variance, Economic Review, 5, 1 – 50.

Engel, R. and Granger, C.W.J. (1987) Cointegration and Error Correction Representation, Estimation and Testing, Econometrica, 55, 251 – 276.

Friedman, M. (1953) The Case for Flexible Exchange Rates, in Essays in Positive Eco-nomics, University of Chicago, Chicago.

Furman, J. and Stigliz, J. (1998) Economic Crises: Evidence and Insight from East Asian, Brookings Papers on Economic Activity, 2, 1 – 135.

Gandolflo, G. (1981) Quantitative Analysis and Econometric Estimation of Continuous Time Dynamic Models. Amsterdam: North-Holland.

Ghura, D. and Grennes, T.J. (1993) The Real Exchange Rate and Macroeconomic Performance in Sub-Saharan Africa, Journal of Development Economics, 32, 155 – l 74.

Giannopoulos, K. (1995) Estimating the Time-Varying Components of International Stock Markets’ Risk, European Journal of Finance, 1, 129 – 164.

Giovannini, A. (1988) Exchange Rates and Traded Goods Prices, Journal of International Economics, 24, 45 – 68.

Gotur, P., 1985. Effects of exchange rate volatility on trade: some further evidence. IMF Staff Papers.

Government of Malaysia (1971) The Second Outline Perspective Plan 1991 – 2000. National Printing Department: Kuala Lumpur

Hood, R. (2001) Malaysian Capital Controls. World Bank Policy Research, Working Paper, 2 – 9.

Hooper, P. and Kohlhagen, S. (1978) The Effect of Exchange Rate Uncertainty on the Price and Volume of International Trade, Journal of International Economics, 8, 483 – 511.

Husted, S. and Macdonald, R. (1999) The Asian Currency Crash: Were Badly Driven Fundamentals to Blame?, Journal of Asian Economics, 10, 537 – 550.

Johansen, S. (1988). Statistical Analysis of Cointegration Vectors, Journal of Economic Dynamic and Control, 12, 231 – 254.

Johansen, S. and Juselius, K. (1990) Maximum Likelihood Estimation and Inference on Cointgeration – With Applications to the Demand for Money, Oxford Bulletin of Economics and Statistical, 52, 169 – 210.

Kenen, P.T. and Rodrik, D. (1986) Measuring and Analyzing the Effects of Short-term Volatility in Real Exchange Rates, Review of Economics and Statistics, 68, 31l – 315.

Kwiatkowski, D., Phillips, P.C.D., Schmidt, P. and Shin, Y. (1992) Testing the Null Hypothesis of Stationarity Against the Alternative of a Unit Root, Journal of Econometrics, 54, 159 – 178.

Mackinon, J.G. (1996) Numerical Distribution Functions for Unit Root and Cointegration Tests, Journal of applied Econometric, 11, 601 – 618.

Magee, S.P. (1975) Prices, Income and Foreign Trade: A Survey of Recent Economic Studies. In: Kenen, P.B. (Ed.), International Trade and Finance: Frontiers for Research. Cambridge Univ. Press: Cambridge.

Mah, J.S. (1994) Japanese Import Demand Behaviour: The Cointegration Approach, Journal of Policy Modeling, 16, 291 – 298.

Mckenzie, M. and Brooks, R. (1997) The Impact of Exchange Rate Volatility on Germany–US Trade Flows, Journal of International Financial Markets, Institutions and Money, 7, 73 – 87.

Mckenzie, M. (1998) The Impact of Exchange Rate Volatility on Australian Trade Flows, Journal of International Financial Markets, Institutions and Money, 8, 21 – 38. Mckenzie, M.D. (1999) The Impact of the Exchange Rate Volatility on International Trade Flows, Journal of Economics Survey, 13, 71 – 106.

Medhora, R. (1990) The Effect of Exchange Rate Variability on Trade: The Case of the West African Monetary Union’s, World Development, 18, 313 – 24.

Moosa, I.A. (2000) Measuring Misalignment in Intra-Arab Exchange Rates. The ERF Seventh Annual Conference, Amman, Jordan, 26 – 30 October 2000.

Narayan, P.K. and Narayan, S. (2005) Estimating income and Price Elasticities of Imports for Fiji in a Cointegration Framework, Economic Modeling, 22, 423 – 438.

Narayan, P.K. (2005) The Saving and Investment Nexus for China: Evidence form Cointegration Tests, Applied Economic, 37, 1970 – 1990.

Pesaran, H.M. and Pesaran, B. (1997) Microfit 4.0. Oxford Univ. Press, England.

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

Rajan, R.S. and Siregar, R.Y. (2002) Choice of Exchange Rate Regime: Currency Board (Hong Kong) or Monitoring Band (Singapore). Australian Economic Papers, 41, 538 – 556.

Rajan, R.S., Sen, R. and Siregar, R.Y. (2004) Misalignment of the Bhat and its Trade Balance Consequence for Thailand in the 1980s and 1990s. The World Economy, 27, 985 – 1012.

Sazanami, Y. and Yoshimura, S. (1999) Restructuring East Asian Exchange Rate Regimes, Journal of Asian Economics, 10, 509 – 523.

Sekkat, K. and Varoudakis, A. (2000) Exchange Rate Management and Manufactured Exports in Sub-Saharan Africa, Journal of Development Economics, 61, 237 – 253.

Sercu, P. and Vanhulle, C. (1992) Exchange Rate Volatility, Exposure and the Value of Exporting Firms, Journal of Banking and Finance, 16, 155 – 82.

Siregar, R.Y and. Har, C.L (2001) Economics Fundamentals and Managed Floating Exchange Rate Regime in Singapore, Journal of Economic Development, 26, 1 – 18.

Siregar, R. and Rajan, R.S. (2004) Impact of Exchange Rate Volatility on Indonesia’s Trade Performance in the 1990s, Journal of the Japanese and International Economies, 18, 218 – 240.

Stein, J. (1994) The natural real exchange rate of the US dollar and determinants of capital flows. In: Estimating Equilibrium Exchange Rates (ed J. Williamson.), 133 – 175. Institute for international Economics, Washington, DC.

Stein, J. (1996) The natural real exchange rate: Theory and application to the real exchange rate of the US dollar relative to the G8 and to the real effective exchange rate of Germany, Working Paper No. 96 – 4. Brown University.

Stein, J. and Paladino, G. (1998) Recent developments in international finance: A guide to research, Journal of Banking and Finance, 21, 1685 – 1720.

Stein, J. and Lim, G. (2002) Introduction to exchange rates in Europe and Australia: Fundamental determinants, adjustment and policy implications. Australia Economic Papers, 41, 329 – 591.