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Evaluating the exchange rate and commodity price nexus in Malaysia: evidence from the threshold cointegration approach

Author

Listed:
  • Shamaila Butt

    (Universiti Teknologi Malaysia)

  • Suresh Ramakrishnan

    (Universiti Teknologi Malaysia)

  • Nanthakumar Loganathan

    (Universiti Teknologi Malaysia)

  • Muhammad Ali Chohan

    (Universiti Teknologi Malaysia)

Abstract

This paper examines the long- and short-run dynamics of asymmetric adjustment between the nominal exchange rate and commodity prices, namely oil, palm oil, rubber, and natural gas prices, in Malaysia using monthly data from January 1994 to December 2017. The relationship between exchange rate and each commodity price is examined in terms of Engle-Granger and threshold cointegrations. The estimated results provide evidence of long-run threshold cointegration and show that the adjustments towards the long-run equilibrium position are asymmetric in the short run. Furthermore, this study finds evidence of a unidirectional causal relationship running from the nominal exchange rate to oil price in the long and short run using a spectral frequency domain causality application. There is also empirical evidence of bidirectional causality between the nominal exchange rate and palm oil price, rubber price, and natural gas price in the long and short run. Overall, the findings have significant implications for the current debate on the future of primary commodities in Malaysia.

Suggested Citation

  • Shamaila Butt & Suresh Ramakrishnan & Nanthakumar Loganathan & Muhammad Ali Chohan, 2020. "Evaluating the exchange rate and commodity price nexus in Malaysia: evidence from the threshold cointegration approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-19, December.
  • Handle: RePEc:spr:fininn:v:6:y:2020:i:1:d:10.1186_s40854-020-00181-6
    DOI: 10.1186/s40854-020-00181-6
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    3. Boris I. Alekhin, 2021. "Oil and the Ruble: Collapse of Cointegration," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 127006, Russia, issue 1, pages 58-74, February.

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