The J-curve: Malaysia versus her major trading partners

Abstract

Currency depreciation is said to worsen the trade balance before improving it, hence the J-curve phenomenon. Since introduction of cointegration and error-correction modelling, researchers have tried to distinguish the short-run effects of currency depreciation from its long-run effects. A few studies that have investigated the experience of Malaysia, have relied upon aggregate trade data and have found no strong support for a significant relation between the real value of the ringgit and the Malaysian trade balance. In this article, we disaggregate the data by country and consider Malaysia's bilateral trade balance with her 14 largest trading partners. Using bound testing approach to cointegration and error-correction modelling, we provide some support for the J-curve hypothesis.

Acknowledgement

Valuable comments of an anonymous referee are appreciated. Remaining errors are ours.

Notes

¹ Malaysia's NEP, first established in 1971, sought to eradicate poverty and end the identification of economic function with ethnicity. In particular, it was designed to enhance the economic standing of ethnic Malays and other indigenous peoples.

² Demery and Demery (1992).

³ The appreciation of the ringgit was due to the inflow of external capital to finance the budget deficit.

⁴ International Monetary Fund (IMF), Annual Report (1998).

⁵ One of the main reasons to adopt such policy is that there was also significant reduction in capital inflows.

⁶ See Fig. 1: nominal versus real exchange rate (RM/$) using quarterly data (1973–2003).

⁷ Arthukorala (1998).

⁸ Malaysia also adopts a short-term capital control to curb capital inflows in 1994.

⁹ To date, the fixed exchange rate policy remains unchanged.

¹⁰ For some other related studies on the trade balance, see Rousslang and Leeuwen (1990), Rahman et al. (1997), Vamvoukas (1999), Weixian (1999), Mah (2000), Miljkovic et al. (2000), Alse and Bahmani-Oskooee (2001), Bahmani-Oskooee (2001), Kyereme (2002), Dar and Amirkhalkhali (2003), Dutta and Ahmed (2004), Berument and Dincer (2005) and Briguglio (2005).

¹¹ This section draws closely from Bahmani-Oskooee and Wang (2007) in this journal. However, for a detailed explanation and exposition of bound testing approach, see Bahmani-Oskooee and Tanku (2007).

¹² The ratio is used to make the measure of trade balance unit free (Bahmani-Oskooee, 1991). For theoretical derivation of the reduced form, see Rose and Yellen (1989, pp. 54–55).

¹³ Another body of the literature concentrates on estimating import and export models separately. Examples include King (1993), Charos et al. (1996), Truett and Truett (2000), Du and Zhu (2001), Agbola and Damoense (2005), Love and Chandra (2005), Narayan and Narayan (2005) and Tegene (2005).

¹⁴ The graphs for other countries are also available from the authors upon request.

¹⁵ Future studies should consider disaggregating trade data at commodity level. The momentum is set by Bahmani-Oskooee and Ardalani (2006) and Bahmani-Oskooee and Wang (2007).