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Empirica

, Volume 44, Issue 2, pp 339–365 | Cite as

Asymmetric effects of exchange rate changes on the Malaysia-EU trade: evidence from industry data

  • Mohsen Bahmani-OskooeeEmail author
  • Muhammad Aftab
Original Paper

Abstract

Owing to exchange rate depreciation, trade balance may deteriorate in the short run but improves in the long run, hence the J-curve phenomenon. Previous research has failed to find a strong support for this phenomenon, which could be due to assuming exchange rate changes to have symmetric effects on the trade balance or due to assuming linear adjustment. The asymmetry cointegration approach, which introduces nonlinearity into the model specification, may resolve a part of the problem if not all. Following a recent nonlinear approach to cointegration (i.e. NARDL), this research examines the phenomenon displayed in Malaysia-EU bilateral trade for each of the 63 industries that trade between the two regions. We find that exchange rate changes have significant short-run asymmetric effects on the trade balance of most industries. As expected, the nonlinear model and asymmetry cointegration provides more support for the J-curve.

Keywords

J-curve Non-linear ARDL approach Asymmetry effects Malaysia EU 

JEL Classification

F31 

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Copyright information

© Springer Science+Business Media New York 2016

Authors and Affiliations

  1. 1.Center for Research on International EconomicsUniversity of Wisconsin-MilwaukeeMilwaukeeUSA
  2. 2.Department of EconomicsUniversity of Wisconsin-MilwaukeeMilwaukeeUSA
  3. 3.Department of Finance and BankingUniversity of MalayaKuala LumpurMalaysia

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