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The Impact of Yuan/Ringgit on Bilateral Trade Balance of China and Malaysia

Author

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  • Hooy, Chee Wooi
  • Chan, Tze-Haw

Abstract

The exposure to exchange rates remains an unresolved issue in international trade literature. The issue is particularly relevant to China and Malaysia, whom relaxed their USD pegging the same day in the mid of 2005. Our paper investigates the exchange rate exposure of China-Malaysian bilateral trade balance over the last 20 years using a standard trade balance equation which is a function of local income, foreign income, and the bilateral real exchange rates of yuan/ringgit. Our modeling is somewhat different with the literature where we take into account the structural breaks of the 1997 Asian currency crisis as well as the fixed-exchange rate regime adopted by the Malaysia. With high frequency monthly sample (Jan1990-Jan2008), we documented GARCH effect in the trade model. Taking that into consideration, our result shows that real exchange rates do play a role in the bilateral trade of China-Malaysia. The long run exchange rate elasticity is consistent with the Marshall-Lerner condition. However, the short run J-curve phenomenon is somewhat inconclusive.

Suggested Citation

  • Hooy, Chee Wooi & Chan, Tze-Haw, 2008. "The Impact of Yuan/Ringgit on Bilateral Trade Balance of China and Malaysia," MPRA Paper 11306, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:11306
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    File URL: https://mpra.ub.uni-muenchen.de/11306/1/MPRA_paper_11306.pdf
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    References listed on IDEAS

    as
    1. Rose, Andrew K. & Yellen, Janet L., 1989. "Is there a J-curve?," Journal of Monetary Economics, Elsevier, vol. 24(1), pages 53-68, July.
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    3. Kwiatkowski, Denis & Phillips, Peter C. B. & Schmidt, Peter & Shin, Yongcheol, 1992. "Testing the null hypothesis of stationarity against the alternative of a unit root : How sure are we that economic time series have a unit root?," Journal of Econometrics, Elsevier, vol. 54(1-3), pages 159-178.
    4. Mohsen Bahmani-Oskooee & Janardhanan Alse, 1994. "Short-Run versus Long-Run Effects of Devaluation: Error-Correction Modeling and Cointegration," Eastern Economic Journal, Eastern Economic Association, vol. 20(4), pages 453-464, Fall.
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    6. Pesaran, H. Hashem & Shin, Yongcheol, 1998. "Generalized impulse response analysis in linear multivariate models," Economics Letters, Elsevier, vol. 58(1), pages 17-29, January.
    7. Rose, Andrew K., 1991. "The role of exchange rates in a popular model of international trade : Does the 'Marshall-Lerner' condition hold?," Journal of International Economics, Elsevier, vol. 30(3-4), pages 301-316, May.
    8. Mohsen Bahmani-Oskooee & Yongqing Wang, 2006. "The J Curve: China Versus Her Trading Partners," Bulletin of Economic Research, Wiley Blackwell, vol. 58(4), pages 323-343, October.
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    More about this item

    Keywords

    Exports; Imports; exchange rates exposure; J-curve; structural breaks; GARCH;

    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; State Space Models
    • F10 - International Economics - - Trade - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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