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Exchange Rate and Trade Balance Relationship: The Experience of ASEAN Countries

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  • Khim-sen Liew

    (Universiti Putra Malaysia)

  • Kian-Ping Lim

    (Universiti Malaysia Sabah)

  • Huzaimi Hussain

    (Universiti Teknologi MARA Samarahan Campus)

Abstract

This study addresses the question of whether exchange rate changes have any significant and direct impact on trade balance. By examining the trade balances between ASEAN-5 countries and Japan for the sample period from 1986 to 1999, this study found that the role of exchange rate changes in initiating changes in the trade balances has been exaggerated. As such, an alternative explanation to the observed behaviour of ASEAN-5 trade balances in the selected sample period has been postulated. In particular, we propose that trade balance is affected by real money, rather than nominal exchange rate. A mathematical framework that provides theoretical background to our proposition is presented. Our empirical data analysis suggests that the real money effect proposition could consistently explain the observed trade balances in Malaysia, Singapore, Thailand and the Philippines during the period of study, with respect to Japan. Thus, in order to cope with trade deficits, the governments of these ASEAN countries might resort to policy measures focusing on the variable of real money.

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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 0307003.

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Date of creation: 23 Jul 2003
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Handle: RePEc:wpa:wuwpit:0307003

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Web page: http://128.118.178.162

Related research

Keywords: Exchange rate; Trade balance; Real money; Purchasing power parity; ASEAN-5 Economies.;

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  1. Matiur Rahman & Muhammad Mustafa & Daryl Burckel, 1997. "Dynamics of the yen-dollar real exchange rate and the US-Japan real trade balance," Applied Economics, Taylor & Francis Journals, vol. 29(5), pages 661-664.
  2. Lal, Anil K. & Lowinger, Thomas C., 2002. "Nominal effective exchange rate and trade balance adjustment in South Asia countries," Journal of Asian Economics, Elsevier, vol. 13(3), pages 371-383.
  3. Mohsen Bahmani-Oskooee, 2001. "Nominal and real effective exchange rates of middle eastern countries and their trade performance," Applied Economics, Taylor & Francis Journals, vol. 33(1), pages 103-111.
  4. Jeremy Greenwood, 1984. "Non-traded Goods, the Trade Balance, and the Balance of Payments," Canadian Journal of Economics, Canadian Economics Association, vol. 17(4), pages 806-23, November.
  5. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 53-68, July.
  6. Bahmani-Oskooee, Mohsen, 1991. "Is there a long-run relation between the trade balance and the real effective exchange rate of LDCs?," Economics Letters, Elsevier, vol. 36(4), pages 403-407, August.
  7. Singh, Tarlok, 2002. "India's trade balance: the role of income and exchange rates," Journal of Policy Modeling, Elsevier, vol. 24(5), pages 437-452, August.
  8. Matiur Rahman & Muhammad Mustafa, 1996. "The dancing of the real exchange rate of US dollar and the US real trade balance," Applied Economics Letters, Taylor & Francis Journals, vol. 3(12), pages 807-808.
  9. Wei Weixian, 1999. "An empirical study of the foreign trade balance in China," Applied Economics Letters, Taylor & Francis Journals, vol. 6(8), pages 485-490.
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