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On the asymmetric effects of exchange rate volatility on trade flows: New evidence from US-Malaysia trade at the industry level

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  • Bahmani-Oskooee, Mohsen
  • Aftab, Muhammad

Abstract

All previous studies that assessed the impact of exchange rate volatility on trade flows assumed that the effects are symmetric. In this paper, we open a new path in the literature by arguing that indeed the effects of exchange rate volatility on trade flows could be asymmetric. The asymmetric effects are mostly due to the change in expectations of traders when a currency depreciates as compared to a case when that currency appreciates. We demonstrate the asymmetric effects by using monthly data from 54 Malaysian industries that export to the U.S. and from 63 Malaysian industries that import from the U.S. The application of the nonlinear Autoregressive Distributed Lag (ARDL) approach of Shin et al. (2014) supports short-run as well as long-run asymmetric effects in almost 1/3rd of the industries. The approach identifies industries that are affected when volatility increases versus those that are affected when volatility declines.

Suggested Citation

  • Bahmani-Oskooee, Mohsen & Aftab, Muhammad, 2017. "On the asymmetric effects of exchange rate volatility on trade flows: New evidence from US-Malaysia trade at the industry level," Economic Modelling, Elsevier, vol. 63(C), pages 86-103.
    • Handle: RePEc:eee:ecmode:v:63:y:2017:i:c:p:86-103
    DOI: 10.1016/j.econmod.2017.02.004
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    References listed on IDEAS

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    More about this item

    Keywords

    Exchange rate volatility; Asymmetry effects; Commodity trade; Malaysia; US; Nonlinear ARDL;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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