Asymmetric effects of exchange rate on trade balance: Malaysia and china

Abstract

High volatility of exchange rates creates uncertainty and in turn affects the economic condition of a country. This can be seen when sudden currency appreciation or depreciation affects the trade flow between countries. This paper examines the existence of the J-curve phenomenon from the effect of exchange rate changes on the bilateral trade balance between Malaysia and China for 17 major trade industries. Besides, the study also evaluates whether the effect of exchange rate fluctuations on the trade balance is symmetric or asymmetric. This study uses monthly data from January 2013 to April 2018. The findings confirm the existence of J-curves for 5 out of the 17 major trade industries. Besides, the results show that the use of non-linear ARDL models is capable to prove the asymmetric effect of exchange rate changes on the trade balance. The results of this study provide insights for policymakers concerning the impact of positive and negative exchange rate changes on the country's major exports to and imports from China. Accordingly, this can be used to detect and mitigate issues of imported inflation.