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