Exchange Rate Movements and Foreign Trade in Four Association ...

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Abstract

Changes in the valuation of the US dollar (USD) are expected to spillover to emerging markets like the four Southeast Asian Nations’ (ASEAN-4) economies, specifically on their foreign exchange. This study aimed at determining the influence of historical USD appreciation/depreciation on international trade by examining the relationship of real exchange rate (RER) with three models of foreign trade (export, import, and trade balance) of the ASEAN-4 emerging markets, namely: Indonesia, Malaysia, the Philippines, and Thailand. Working with annual data for the period 1970–2016 and employing the autoregressive distributive lag (ARDL) approach to co-integration, it is found that RER has a long-run relationship to the three models of foreign trade for all the ASEAN-4 countries. This may imply that changes in the value of the ASEAN-4 currencies vis-à-vis the USD would significantly change the international trade patterns of these emerging markets. Using the error correction model (ECM), significant short-run relationships are found in all ASEAN-4 economies, with trade balance as the model of foreign trade for the period 1970–2016. This may indicate that should there be short-term shocks to foreign exchange rates, trade balance would adjust and return to long-run equilibrium.