Real Exchange Rate and Trade Balance Relationship: An Empirical Study on Malaysia

International Journal of Business and Management, Vol. 3, No. 8, pp. 130–137, 2008

8 Pages Posted: 8 May 2009

See all articles by Yuen-Ling Ng

Yuen-Ling Ng

affiliation not provided to SSRN

Wai-Mun Har

Universiti Tunku Abdul Rahman (UTAR)

Geoi-Mei Tan

affiliation not provided to SSRN

Date Written: August 1, 2008

Abstract

This paper attempts to identify the relationship between the real exchange rate and trade balance in Malaysia from year 1955 to 2006. This study uses Unit Root Tests, Cointegration techniques, Engle-Granger test, Vector Error Correction Model (VECM), and impulse response analyses. The main findings of this paper are: (i) long run relationship exists between trade balance and exchange rate. Other important variables that determine trade balance such as domestic income shows a long run positive relationship between trade balances, and foreign income shows a long run negative relationship (ii) the real exchange rate is an important variable to the trade balance, and devaluation will improve trade balance in the long run, thus consistent with Marshall-Lerner condition (iii) the results indicate no J-curve effect in Malaysia case.

Keywords: Exchange rate, Trade balance, Devaluation, Cointegration, Malaysian economy

JEL Classification: F43

Suggested Citation

Ng, Yuen-Ling and Har, Wai-Mun and Tan, Geoi-Mei, Real Exchange Rate and Trade Balance Relationship: An Empirical Study on Malaysia (August 1, 2008). International Journal of Business and Management, Vol. 3, No. 8, pp. 130–137, 2008, Available at SSRN: https://ssrn.com/abstract=1398329

Yuen-Ling Ng

affiliation not provided to SSRN ( email )

Wai-Mun Har (Contact Author)

Universiti Tunku Abdul Rahman (UTAR) ( email )

Sungai Long Campus Lot PT 21144
Bandar Sg. Long, Cheras, Selangor D.E.,
Bandar Sungai Long, 43000
Malaysia

Geoi-Mei Tan

affiliation not provided to SSRN ( email )

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