Asymmetric cointegration relationship between real exchange rate and trade variables: The case of Malaysia
AbstractThe present study attempts to analyze the long-run equilibrium relationship between real exchange rate and trade balance, imports and exports demand by cointegration tests assuming asymmetric adjustment. Following Enders and Siklos (2001), the Engle-Granger two-step cointegration test is expanding to incorporate an asymmetric error correction term. It is found that there exists asymmetric cointegration between balance of trade and real exchange rate when momentum-threshold autoregressive (M-TAR) model is conducted and the study also found asymmetric cointegration between import volume and real exchange rate under threshold autoregressive (TAR) model. From estimation of M-TAR error-correction trade balance model, the adjustment back to equilibrium is more rapid following relative increase in trade balance (above long-run value) compared to relative decrease in trade balance (below long-run value). From TAR error-correction import demand model, the model suggests quick adjustment of import demand once it is below long-run value. The results reflect the evidence of persistence of trade balance deficit in the case of Malaysia which probably due to policies to defend an overvalued exchange rate by protectionist trade policies or capital controls. In addition, the shock of exchange rate on import demand is likely to be temporary in nature.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 14535.
Date of creation: Mar 2009
Date of revision:
Asymmetric cointegration; Trade balance; Threshold autoregressive; Momentum-threshold autoregressive;
Find related papers by JEL classification:
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- F10 - International Economics - - Trade - - - General
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-13 (All new papers)
- NEP-IFN-2009-04-13 (International Finance)
- NEP-INT-2009-04-13 (International Trade)
- NEP-SEA-2009-04-13 (South East Asia)
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