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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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    3. Chun‐Hsuan Wang & Chun‐Hung A. Lin, 2005. "Using Threshold Cointegration To Examine Asymmetric Price Adjustments Between Adr'S And Their Underlying Securities ‐ The Case Of Taiwan," South African Journal of Economics, Economic Society of South Africa, vol. 73(3), pages 449-461, September.
    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. 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.
    6. 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. Onatunji Olufemi, 2019. "Do real exchange rate changes have symmetric or asymmetric effects on trade balance in Nigeria? Evidence from Non-linear ARDL Model," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 11(1), pages 14-23, June.
    3. Alhaji Jibrilla Aliyu & Shehu Mohammed Tijjani & Caroline Elliott, 2015. "Asymmetric cointegration between exchange rate and trade balance in Nigeria," Cogent Economics & Finance, Taylor & Francis Journals, vol. 3(1), pages 1045213-104, December.
    4. Dincer Dedeoglu & Kaan Ogut, 2017. "Asymmetric cointegration with threshold adjustment model of exchange rates and the trade balance in Turkey," The Journal of International Trade & Economic Development, Taylor & Francis Journals, vol. 26(2), pages 174-194, February.

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    More about this item

    Keywords

    Asymmetric cointegration; Trade balance; Threshold autoregressive; Momentum-threshold autoregressive;
    All these keywords.

    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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