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

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 t...

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Main Author: Duasa, Jarita
Format: Monograph
Language:English
Published: - 2009
Subjects:
Online Access:http://irep.iium.edu.my/1336/1/Asymmetric_Cointegration_Relationship_between_Real_Exchange_Rate_and_Trade_Variables-The_Case_of_Malaysia.pdf
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author Duasa, Jarita
author_facet Duasa, Jarita
author_sort Duasa, Jarita
collection IIUM
description 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 export 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.
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spelling oai:generic.eprints.org:13362012-01-19T03:48:50Z http://irep.iium.edu.my/1336/ Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia Duasa, Jarita HG Finance 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 export 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. - 2009 Monograph PeerReviewed application/pdf en http://irep.iium.edu.my/1336/1/Asymmetric_Cointegration_Relationship_between_Real_Exchange_Rate_and_Trade_Variables-The_Case_of_Malaysia.pdf Duasa, Jarita (2009) Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia. Working Paper. -. (Unpublished) http://econpapers.repec.org/paper/pramprapa/14535.htm
spellingShingle HG Finance
Duasa, Jarita
Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia
title Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia
title_full Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia
title_fullStr Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia
title_full_unstemmed Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia
title_short Asymmetric cointegration relationship between real exchange rate and trade variables: the case of Malaysia
title_sort asymmetric cointegration relationship between real exchange rate and trade variables the case of malaysia
topic HG Finance
url http://irep.iium.edu.my/1336/1/Asymmetric_Cointegration_Relationship_between_Real_Exchange_Rate_and_Trade_Variables-The_Case_of_Malaysia.pdf
work_keys_str_mv AT duasajarita asymmetriccointegrationrelationshipbetweenrealexchangerateandtradevariablesthecaseofmalaysia