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Asymmetric cointegration relationship between real exchange rate and trade variables: The case of Malaysia

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  • Duasa, Jarita

Abstract

The 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.

Suggested Citation

  • Duasa, Jarita, 2009. "Asymmetric cointegration relationship between real exchange rate and trade variables: The case of Malaysia," MPRA Paper 14535, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:14535
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    File URL: https://mpra.ub.uni-muenchen.de/14535/1/MPRA_paper_14535.pdf
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    References listed on IDEAS

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    1. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-645, August.
    2. Chen, Li-Hsueh & Finney, Miles & Lai, Kon S., 2005. "A threshold cointegration analysis of asymmetric price transmission from crude oil to gasoline prices," Economics Letters, Elsevier, vol. 89(2), pages 233-239, November.
    3. Shu-Chen Chang, 2008. "Asymmetric cointegration relationship among Asian exchange rates," Economic Change and Restructuring, Springer, vol. 41(2), pages 125-141, June.
    4. Janardhanan Als & Mohsen Bahmani-Oskooee, 1995. "Do devaluations improve or worsen the terms of trade?," Journal of Economic Studies, Emerald Group Publishing, vol. 22(6), pages 16-25, October.
    5. Paresh Kumar Narayan, 2007. "Are Nominal Exchange Rates and Price Levels Co-Integrated? New Evidence from Threshold Autoregressive and Momentum-Threshold Autoregressive Models," The Economic Record, The Economic Society of Australia, vol. 83(260), pages 74-85, March.
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    Cited by:

    1. Hasanov, Fakhri, 2012. "The impact of the real exchange rate on non-oil exports. Is there an asymmetric adjustment towards the equilibrium?," MPRA Paper 43728, University Library of Munich, Germany.
    2. repec:taf:oaefxx:v:3:y:2015:i:1:p:1045213 is not listed on IDEAS
    3. repec:taf:jitecd:v:26:y:2017:i:2:p:174-194 is not listed on IDEAS

    More about this item

    Keywords

    Asymmetric cointegration; Trade balance; Threshold autoregressive; Momentum-threshold autoregressive;

    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

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