Role of Exchange Rate on Trade Balance and J-curve Effect between Thailand and Malaysia: An Industry Level Analysis
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The existing literature regarding the role of real exchange rate on balance of trade reveals mixed empirical findings. The remarkable argument for the inconclusive results is the aggregation bias emanating from aggregating either trading partners or trading commodities in the study. This paper scrutinizes the role of exchange rate on trade balance of Thailand vis-à-vis Malaysia at disaggregated level using annual data (1971-2017) at 2-digit level of 27 SITC industries with the autoregressive distributed lag (ARDL) model. Our findings show that a depreciation of Thai Baht (THB) against Malaysian Ringgit (MYR) causes improvement on Thailand’s trade balance rather than generating a J-curve phenomenon in the short run. The J-curve effects are detected in 6 industries which account for 8.49 per cent of Thailand’s total trade share with Malaysia. The positive long run effects of a real depreciation of THB against MYR on Thailand’s trade balance are found in 10 industries which represent 29.75 per cent of Thailand-Malaysia total trade values. Our empirical findings provide an important policy implication for Thailand. The estimation results imply that the exchange rate policy is still an important measure to improve trade balance of certain industries of Thailand against Malaysia. Nonetheless, a depreciation of THB against MYR will also worsen trade balance of 6 products in the short run, caused by the J-curve effects. Therefore, the authorities should implement the policy cautiously.
Abstract
The existing literature regarding the role of real exchange rate on balance of trade reveals mixed empirical findings. The remarkable argument for the inconclusive results is the aggregation bias emanating from aggregating either trading partners or trading commodities in the study. This paper scrutinizes the role of exchange rate on trade balance of Thailand vis-à-vis Malaysia at disaggregated level using annual data (1971-2017) at 2-digit level of 27 SITC industries with the autoregressive distributed lag (ARDL) model. Our findings show that a depreciation of Thai Baht (THB) against Malaysian Ringgit (MYR) causes improvement on Thailand’s trade balance rather than generating a J-curve phenomenon in the short run. The J-curve effects are detected in 6 industries which account for 8.49 per cent of Thailand’s total trade share with Malaysia. The positive long run effects of a real depreciation of THB against MYR on Thailand’s trade balance are found in 10 industries which represent 29.75 per cent of Thailand-Malaysia total trade values. Our empirical findings provide an important policy implication for Thailand. The estimation results imply that the exchange rate policy is still an important measure to improve trade balance of certain industries of Thailand against Malaysia. Nonetheless, a depreciation of THB against MYR will also worsen trade balance of 6 products in the short run, caused by the J-curve effects. Therefore, the authorities should implement the policy cautiously.
참고문헌 (32)
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