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Examining Exchange Rates Exposure, J-Curve and the Marshall-Lerner Condition for High Frequency Trade Series between China and Malaysia
Hooy, Chee-Wooi and Chan, Tze-Haw Universiti Sains Malaysia, Multimedia University - Centre for Globalisation and Sustainability Research

31. August 2008

Online at http://mpra.ub.uni-muenchen.de/10916/ MPRA PaperNo. 10916, posted 06. October 2008 / 06:36

Full title:

EXAMINING EXCHANGE RATES EXPOSURE, J-CURVE AND THE MARSHALL-LERNER CONDITION FOR HIGH FREQUENCY TRADE SERIES BETWEEN CHINA AND MALAYSIA

Authors:

HOOY CHEE WOOI Finance Section School of Management Universiti Sains Malaysia Email: cwhooy@usm.my CHAN TZE-HAW Centre for Globalization and Sustainability Research Faculty of Business andLaw Multimedia University, Malaysia Email: thchan@mmu.edu.my

Abstract:

Over the last decade, China and Malaysia have committed to export-led growth policy based on maintenance of their undervalued currencies. Both nations had succumbed to pressure of revaluation to de-peg their currency against the USD, the same day in July 2005. This unique scenario motivated us to examine the dynamic nexusof exchange rate impact on bilateral export and import flows between China and Malaysia. Our analysis contributed in using high frequency monthly data for the recent period from January 1990 to January 2008, based on the Autoregressive Distributed Lag (ARDL) bound testing procedure and generalised impulse response analysis. Our empirical findings reveal that the Marshall-Lerner condition holdsthat real depreciation accelerates trade expansion in the long run but only the short run import demands adhere to the potential J-curve pattern. Domestic and foreign incomes are significant and correctly signed, suggesting that the China-Malaysia exports and imports are determined by demand side effects. In brief, the study supports for the complementary role of China instead of conflicting(competing) features in the China-Malaysia bilateral trading.

Keywords:

Exchange rates, Trade, J-curve, Marshall-Lerner Condition, ARDL Bounds test

JEL Classification Codes: F31 Conference Track: Track C - Economics Correspondence to: HOOY CHEE WOOI Finance Section, School of Management Universiti Sains Malaysia, 11800 USM Penang, Malaysia Email: cwhooy@usm.my Telephone: 604-653-2897 Fax No:604-657-7448

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EXAMINING EXCHANGE RATES EXPOSURE, J-CURVE AND THE MARSHALL-LERNER CONDITION FOR HIGH FREQUENCY TRADE SERIES BETWEEN CHINA AND MALAYSIA Hooy Chee-Wooi a,ψ and Chan Tze-Haw b
a

Universiti Sains Malaysia, Malaysia b Multimedia University, Malaysia

Abstract Over the last decade, China and Malaysia have committed to export-led growth policy based on maintenance of theirundervalued currencies. Both nations had succumbed to pressure of revaluation to de-peg their currency against the USD, the same day in July 2005. This unique scenario motivated us to examine the dynamic nexus of exchange rate impact on bilateral export and import flows between China and Malaysia. Our analysis contributed in using high frequency monthly data for the recent period from January 1990 toJanuary 2008, based on the Autoregressive Distributed Lag (ARDL) bound testing procedure and generalised impulse response analysis. Our empirical findings reveal that the Marshall-Lerner condition holds that real depreciation accelerates trade expansion in the long run but only the short run import demands adhere to the potential J-curve pattern. Domestic and foreign incomes are significant andcorrectly signed, suggesting that the China-Malaysia exports and imports are determined by demand side effects. In brief, the study supports for the complementary role of China instead of conflicting (competing) features in the China-Malaysia bilateral trading.

Keywords:

Exchange rates, Trade, J-curve, Marshall-Lerner Condition, ARDL Bounds test

JEL Classification Codes: F31.

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