Determinants of Malaysian Trade Balance: An ARDL Bound Testing Approach

Abstract

This paper examines the short- and long-run relationships between trade balance, real exchange rates, income and money supply in the case of Malaysia. The inclusion of income and money variables in the study is purposely to examine the monetary and absorption approaches to the balance of payments beside the conventional approach of elasticity, using exchange rates. Using the bound testing approach to cointegration and error correction models, developed within an autoregressive distributed lag (ARDL) framework, we investigate whether a long-run equilibrium relationship exists between trade balance and the determinants. Additionally, we adopt an innovation accounting by simulating variance decompositions (VDC) and impulse response functions (IRF) for further inferences. Using this approach, we find evidence of a long-run relationship between trade balance and income and money supply variables but not between trade balance and real exchange rate. The findings also suggest that Marshall–Lerner condition does not hold in the long-run for Malaysia and for policy wise the Malaysian trade balance/balance of payments should be viewed from absorption and monetary approaches.     

The Effect of Exchange Rate on Bilateral Trade Balance: New Evidence from Malaysia and Thailand

This paper attempts to identify the major economic factors that influence the bilateral trade balances of Malaysia and Thailand with the US and Japan. To this end, an unrestricted VAR model was estimated using quarterly frequency data from 1980: I to 1996: IV. The Johansen results indicate a stable long-run relation between trade and three macro variables: exchange rate, domestic income and foreign income. The main findings of this paper are: (i) the real effective exchange rate is an important variable in the trade balance equation and devaluation improves the trade balances of both economies in the long-run; (ii) the other important variables that determine trade balance include domestic and foreign incomes; (iii) the results indicate no J-curve effect and causal run from exchange rate to trade balance, (iv) the real effects of devaluation are distributed over a period of eight to nine quarters.     

Short-run and long-run effects of exchange rate change on trade balance: Evidence from China and its trading partners

As one of largest exporting countries in the world, China has experienced a large amount of trade surpluses for the past decade. However, a growing criticism has been focused on the manipulation of Chinese Yuan (RMB) exchange rate by the Chinese government. While China implemented the exchange rate reform policy in July 2005, the question, whether its currency is undervalued remains as a debatable issue. Different from previous studies by focusing on individual trading partners, this paper tests the short-run J-Curve hypothesis and long-run trade balance effect of real exchange rate between China and its eighteen major trading partners using a panel dataset over the 2005–2009 period. We adopt the methodologies of panel cointegration test, fully modified OLS for heterogeneous cointegrated panel (panel FMOLS) and panel error correction model (panel ECM) to investigate the above examination. Our empirical results lend support to the inverted J-curve hypothesis between China and its trading partners. However, we find that a real appreciation of RMB has a decreasing long-run effect on China's trade balance in only three of the eighteen trading partners, while it has an increasing long-run effect in five of the eighteen trading partners. These mixed findings, therefore, lead to the empirical evidence that the real appreciation of RMB has no overall long-run impact on China's trade balance.     

An empirical analysis of China's equilibrium exchange rate: A co-integration approach

This paper estimates time specific values for China's long-run equilibrium exchange rate and develops measures of the direction and extent of misalignment based on a reduced-form real effective exchange rate (REER) model. An appropriately specified long-run equilibrium model is estimated and tested following Johansen and Juselius (1990) procedures, which is then used to construct an estimated time path for long-run equilibrium exchange rate values.Unit root tests indicated that each series can be considered as I(1) and that there was one cointegrating relationship linking the RMB series with its “fundamentals” – openness, money supply, productivity and government spending – with long-run elasticities of (0.41), (0.97), (0.51) and (0.75), respectively. The estimated error-correction model of REER determination showed that during China's latest exchange rate regime (from 2005:Q3) the RMB was undervalued by an average of 6.7 percent, which is modest compared to related studies.Estimation of the associated short-run error correction model shows that the error correction term has a statistically significant value of 0.85, implying that the actual real effective exchange rates would converge relatively quickly (just over one quarter, on average) towards their long-run equilibrium level in the absence of central bank intervention.     

The stock market and the ringgit exchange rate: a note

This paper presents and tests an augmented monetary model that includes the effect of stock prices on the bilateral exchange rates. The model is applied to the ringgit/US dollar (RM/US) and ringgit/Japanese yen (RM/JY) exchange rates. The empirical analysis is conducted by the Johansen method of cointegration. Using the data from the recent float that ends with 1996:Q4, the study is motivated, among others, by an interesting preliminary finding that although the augmented monetary model is cointegrated, it is subject to parameter instability and that the parameter time dependency can be attributed at least partly to a particular subset of the variables in the system including stock prices. We find that a restricted VAR model which imposes exogeneity restrictions on I(1) variables, such as stock prices, among others, exhibits both cointegration and parameter stability. In addition, we demonstrate that exchange rate adjusts to clear any disequilibrium in the long-run relationship. The empirical findings tend to suggest that the equity market is significant in affecting the exchange rate and in explaining at least in part the parameter instability evidenced in the cointegrating system. Hence, we conclude that models of equilibrium exchange rate should be extended to include equity markets in addition to bond markets.     

The Post‐Mao economic reform in China: A Korean view

Abstract

Previous studies that were concerned with the impact of depreciation of the ringgit on the Malaysian trade balance employed data either between Malaysia and rest of the world or between Malaysia and each of her major trading partners. Specifically, the bilateral trade balance between Malaysia and the US is shown to be insensitive to the real bilateral ringgit–dollar rate. In this article we wonder if disaggregating trade flows between Malaysia and the US by commodity could help us to discover any significant effects that the real exchange rate could have. We consider 101 industries that export from US to Malaysia and 17 industries that import from Malaysia. While majority of the industries showed short-run sensitivity to the real bilateral exchange rate, short-run effects lasted into the long run almost in half of the industries in both group.     

Exchange rates,stock prices,and money markets: evidence from Singapore

This paper uses a monetary approach to analyze the asymmetric asset-price movements (exchange rates and stock prices) in Singapore, a small open economy with managed exchange rate targeting. The Singapore dollar exchange rates vis-à-vis the developed countries’ currencies are negatively related to stock prices whereas the relationship between the Singapore dollar-Malaysian ringgit exchange rate and stock prices is positive instead. The pattern of asymmetry is explained by the relative exchange-rate elasticity of real money demand and real money supply and evidenced by the distributed-lag regression and VAR analysis. Furthermore, the distributed-lag regression of monthly data suggests that fiscal revenues as well as fiscal expenditures exert positive influences on stock prices.     

The common trend and common cycle of exports and the real exchange rate: Empirical results from Swiss data

Conclusion This paper contains an empirical analysis of the relationship of Swiss goods exports, the real exchange rate and world trade, using the common-trend-common-cycle methodology. This exercise shows that the trend and cyclical dependence of these variables are strongly different: exports and the real exchange rate exhibit a positive long-run or trend dependence of world trade whereas the short-run or cyclical relationship of exports to the real exchange rate is strongly negative with approximately a unit elasticity. These results, which differ strongly from standard dynamic regression or error correction estimates, can be interpreted as follows. In the short run we observe the strong negative cyclical relationship between exports and the real exchange rate, which we expect from short-run macroeconomic models with sticky prices. If we make the reasonable assumption that short-run real exchange rate movements are exogenous to exports and, for instance, caused by monetary policy then we come to the conclusion that cyclical real exchange rate variations lead to strong export cycles. However, in the long run, there is a completely different positive comovement of these two variables, which are both driven by the world trade trend. This common trend of exports and the real exchange rate can be understood as an equilibrium reaction of both variables, price and quantity of the exported goods, to exogenous changes in world trade given a production technology available for the country.     

Tax and Spend,or Spend and Tax? An Inquiry into the Turkish Budgetary Process

For resolving the budget deficit problem, some economists have advocated spending cuts, while others support either tax increases or tax cuts. This paper investigates the interrelationship between the two fiscal variables for Turkey using bivariate and multivariate cointegrating models. The Engle-Granger and Johansen tests consistently support the existence of one nonzero cointegrating vector representing a stable long-run relationship between government spending and revenues in Turkey. Furthermore, the multivariate error-correction model suggests that taxes unidirectionally Granger-cause negative changes in spending in accordance with the Buchanan-Wagner hypothesis. Thus, from the perspective of policy making and the deficit solution debate, raising taxes in Turkey is perhaps the optimal solution to the current budget deficit predicament.     

Real Exchange Rates and Fundamentals: Evidence from 15 OECD Countries

In an extended Balassa–Samuelson model, long-run real exchange rates are determined by relative productivity and terms of trade. We present evidence of systematic long-run relationships between these fundamental variables and real exchange rates in a data set covering 15 OECD countries from 1960 to 1996. High relative productivity is associated with real exchange rate appreciations in most cases. There is less support for the hypothesis that the terms of trade affect equilibrium real exchange rates.     

Fiscal announcements and real exchange rate dynamics

This paper examines the dynamic impact of anticipated government spending on real exchange rates in a general-equilibrium framework. I show that an increase in government spending causes persistent movements in real exchange rates, and that the time profile of real exchange rates differs with patterns of government spending. Hence, one of the explanations for the misalignment and excess volatility of real exchange rates during the flexible exchange rate system may be volatile changes in government spending.     

Impacts of macroeconomic policies on the Mexican output

This paper examines the potential effects of macroeconomic policies, stock market performance, exchange rate fluctuations, and other related variables on real GDP in Mexico. Extending the works by Arango and Nadiri (1981) and Bahmani‐Oskooee and Ng (2002), and applying comparative‐static analysis, possible effects of a change in the exchange rate or government debt on the equilibrium output are examined. All the variables have unit roots and are stationary in first difference. There is a long‐run stable relationship between real GDP and the right‐hand‐side variables. The GARCH(p,q) (Engle 2001) model is applied to estimate regression parameters. Real GDP is positively associated with real M2, government deficit spending, stock prices, U.S. output, and world oil prices, and negatively affected by the government debt ratio, peso depreciation, and the expected inflation rate. Therefore, fiscal policy to incur more debt needs to be pursued with caution, and both net exports and money demand need to be considered in studying the impact of exchange rate fluctuations on output.     

Government Spending Patterns and the Real Exchange Rate in Sub‐Saharan Africa

Do government spending patterns and composition influence the behaviour of the real exchange rate in sub‐Saharan Africa (SSA)? First, we present a two‐sector small open economy model which proposes that government spending together with productivity differential leads to real exchange rate appreciation. Then, we take these propositions to SSA data and perform a coordinated empirical analysis. Interestingly, we find empirical support for the propositions in SSA. Finally, we disaggregate government spending into three components—consumption, investment and transfer payments—and check whether the composition of government spending provides any insight into the behaviour of the real exchange rate in SSA. Our results suggest that government composition does influence the real exchange rate in SSA. Specifically, we find that government consumption induces a real appreciation while government investment leads to a real depreciation. Although these findings yield appropriate magnitudes and signed directions, their effects are not always significant.     

Bank loans and the effects of monetary policy in China: VAR/VECM approach

In this paper, we test the differential effects of monetary policy shock on aspects of banks' balance sheets (deposits, loans, and securities) across bank categories (aggregate banks, state banks, and non-state banks) as well as on macroeconomic variables (output, consumer price index, exports, imports, and foreign exchange reserves). We do so by estimating VAR/VEC Models to uncover the transmission mechanisms of China's monetary policy. Also we identify the cointegrating vectors to establish the long-run relationship between these variables. By using monthly aggregate bank data and disaggregated data on bank and loan types from 1996 to 2006, our study suggests the existence of a bank lending channel, an interest rate channel and an asset price channel. Furthermore, we discuss and explore the distribution and growth effects of China's monetary policy on China's real economy. In addition, we investigate the effects of China's monetary policy on China's international trade. Finally, we identify the cointegrating vectors among these variables and set up VEC Models to uncover the long-run relationships that connect the indicators of monetary policy, bank balance sheet variables and the macroeconomic variables in China.     

Current Account and Fiscal Policy in Japan: 1885–1991

This paper explores the empirical relationship between the current account balance and macroeconomic series for the Japanese economy over the years 1885–1991. The long-run equilibrium depends on which series (public debt or budget deficits) affects assets relative to a capital stock rate. Departing from the Ricardian Equivalence structure (no bequest motives), fiscal policy in Japan is shown to be more related to the current account when policy is introduced by shifts in tax revenues rather than by changes in national debt.     

Macroeconomic implications of population aging: Evidence from Japan

Population aging is an important feature of Japan’s economy, which since 2006 has become a super-aged society. Changes in the age distribution of the population have important macroeconomic implications. Using annual data for 1960–2015, this study tests whether population age shares have long run influences on domestic saving, domestic investment, real GDP, inflation, the fiscal balance, and the current account balance. Cointegration is found between each macroeconomic variable and the demographic variables, which is a key finding of the analysis. The main empirical findings from the long-run cointegrating equations are that the effects of demographic change on the macroeconomic variables are statistically significant and quite strong. Alternative variants of the United Nation’s population projections provide further evidence of the importance of the demographic changes for Japan’s macroeconomic future. This study finds that future trends of key macroeconomic variables are not monotonic, but rather that long swings in the demographic factors produce a mixture of moderate growth periods and episodes of GDP stagnation.     

Reserve Accumulation and Money Supply in China: A Time-Varying Analysis

This study investigates the causal relationship between reserve accumulation and money supply in China over the period of 1999 M1–2015 M6. First, we use a Granger causality test and find that there is a unidirectional relationship from money supply growth to reserve accumulation growth; however, taking structural changes into account, we assess stability of parameters of the estimated vector autoregressive models. We find both the short-run and long-run relationships between money supply growth and reserve accumulation growth estimated using full-sample data are unstable over the sample period. This suggests that full-sample causality tests cannot be relied upon. We turn to propose a time-varying (bootstrap) rolling-window approach to revisit the dynamic causal relationship between the two variables. We find that two variables have causal relationships in some sub-periods. We argue that reserve accumulation growth has put pressure on money supply growth. However, in general, sterilization is effective, but not in few months 2006–2007. And money supply has a positive reserve accumulation from the second half of 2001–2003 because RMB was undervalued under the fixed exchange rate regime. We argue that the improvements of monetary policy and the exchange rate regime are crucial to break the relationship between reserve accumulation growth and the money supply growth.     

Assessing the Equilibrium Exchange Rate of the Malaysian Ringgit: A Comparison of Alternative Approaches

Drawing on the behavioral equilibrium exchange rate and the fundamental equilibrium exchange rate approaches, this paper assesses the equilibrium value of the real effective exchange rate of the Malaysian ringgit over the past 25 years. For 2005, when the Malaysian authorities exited from the peg with the US dollar, both models determine a slight undervaluation of the currency. Openness and real GDP per capita have been the main drivers of real exchange rate movements in the past, although non-tradable productivity, government consumption, and net foreign assets have also had a sizable impact. The paper also highlights the limitations of applying the two approaches in the context of emerging countries.     

Financial crises,Asian stock indices,and current accounts: An Asian-U.S. comparative study

This paper investigates the effects of financial crises-based exchange rate, real interest rate, and personal consumption expenditure on stock market indices and balances of current account in four Asian countries/areas, and the U.S. from 1997 to 2010. Results obtained from Sims's first-order DSGE representation suggest that two policy variables – changes in the exchange rate and changes in the real interest rate lagged by one quarter – act as stabilizers for contemporaneous changes in stock indices for Thailand, Malaysia, and the U.S., but as destabilizers for Taiwan and Hong Kong. However, changes in personal consumption expenditure lagged by one quarter only play a destabilizing role in Hong Kong. For contemporaneous changes in the current account balance, all three policy variables become destabilizers for all five countries except the one-quarter lagged change in real interest rate, which acts as a stabilizer in Malaysia.     

The elasticities approach in general equilibrium: Real shock dynamics

This paper constructs a general equilibrium model that embodies: the elasticities approach to the trade balance in the long run, but allows for inelastic short run demand; and an asset market approach to the capital account, with uncovered interest parity and consistent expectations.Two policies are examined: increased government expenditure and an increased import tariff. The effects of these policies on net exports, the exchange rate, and other variables are determined. A phase diagram demonstrates the dynamic adjustment paths of the exchange rate and the trade balance, and provides a general equilibrium explanation for overshooting and the J-curve as a result of real shocks. Extensions are made to account for policy pre-announcement, the Laursen-Metzler effect, and large-country effects.