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Impact of exchange rate shock on prices of imports and exports

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  • Duasa, Jarita

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.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 11624.

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Date of creation: 2008
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Handle: RePEc:pra:mprapa:11624

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Keywords: Import prices; Export prices; VECM; Impulse Response; Variance Decomposition;

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  1. M.B. Devereux & Ch. Engel, 2003. "Exchange Rate Pass-Through, Exchange Rate Volatility, and ExchangeRate Disconnect," DNB Staff Reports (discontinued) 77, Netherlands Central Bank.
  2. Cedric Tille, 2000. ""Beggar-thy-neighbor" or "beggar-thyself"? the income effect of exchange rate fluctuations," Staff Reports 112, Federal Reserve Bank of New York.
  3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  4. Johansen, Søren & Juselius, Katarina, 1992. "Testing structural hypotheses in a multivariate cointegration analysis of the PPP and the UIP for UK," Journal of Econometrics, Elsevier, vol. 53(1-3), pages 211-244.
  5. J. McCarthy, 1999. "Pass-through of exchange rates and import prices to domestic inflation in some industrialised economies," BIS Working Papers 79, Bank for International Settlements.
  6. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  7. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
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