Asymmetric cointegration relationship between real exchange rate and trade variables: The case of Malaysia

Transcription

1 MPRA Munich Personal RePEc Archive Asymmeric coinegraion relaionship beween real exchange rae and rade variables: The case of Malaysia Jaria Duasa Inernaional Islamic Universiy Malaysia March 29 Online a hp://mpra.ub.uni-muenchen.de/4535/ MPRA Paper No. 4535, posed 9. April 29 :3 UTC

2 ASYMMETRIC COINTEGRATION RELATIONSHIP BETWEEN REAL EXCHANGE RATE AND TRADE VARIABLES: THE CASE OF MALAYSIA Jaria Duasa Deparmen of Economics, Kulliyyah of Economics and Managemen Sciences, Inernaional Islamic Universiy Malaysia, P. O. Box, 5728 Kuala Lumpur. Tel: Fax: Absrac The presen sudy aemps o analyze he long-run equilibrium relaionship beween real exchange rae and rade balance, impors and expors demand by coinegraion ess assuming asymmeric adjusmen. Following Enders and Siklos (2), he Engle-Granger wo-sep coinegraion es is expanding o incorporae an asymmeric error correcion erm. I is found ha here exiss asymmeric coinegraion beween balance of rade and real exchange rae when momenum-hreshold auoregressive (M-TAR) model is conduced and he sudy also found asymmeric coinegraion beween expor volume and real exchange rae under hreshold auoregressive (TAR) model. From esimaion of M-TAR error-correcion rade balance model, he adjusmen back o equilibrium is more rapid following relaive increase in rade balance (above long-run value) compared o relaive decrease in rade balance (below long-run value). From TAR error-correcion impor demand model, he model suggess quick adjusmen of impor demand once i is below long-run value. The resuls reflec he evidence of persisence of rade balance defici in he case of Malaysia which probably due o policies o defend an overvalued exchange rae by proecionis rade policies or capial conrols. In addiion, he shock of exchange rae on impor demand is likely o be emporary in naure. Keywords: Asymmeric coinegraion; Trade balance; Threshold auoregressive; Momenumhreshold auoregressive.. INTRODUCTION As a small and open economy, Malaysia is significanly affeced by exernal influences. The exernal influences include he exchange rae, world demand and he erm of rade. In he afermah of he Asian financial crisis, large concern on he impac of exchange rae on he real economy is quie obvious. In paricular, he immediae impac of exchange rae shock on volume of expors and impors is very much concern by he auhoriy as Malaysia heavily relies on impors and expors. In fac, Malaysia survival from he 997 financial crisis was largely conribued by is posiive balance of rade posiion. During he recession of 997 and 998, he counry had a large rade surplus of US$4. billion in 997 and US$7.7 billion in 998. In November 28, Malaysia recorded a rade surplus of RM.49 billion, making i he 33 rd consecuive monh of rade surplus since November 997. The effecs of hese influences on Malaysian business cycle are ofen examined using a modeling approach. In he area of inernaional rade, large number of sudies widely

3 used coinegraion analysis o invesigae he inerdependence beween variables. One of coinegraion echniques applied is adoped from Engle and Granger (987). A sudy by Arize (994), for example, adoped his wo-sep coinegraion es suggesed by Engle and Granger (987) o examine he long-run relaion beween real effecive exchange rae and he rade balance in nine Asian economies. The approach is found o be an accepable subsiue for esing he Marshall-Lerner condiion of sabiliy. On similar issue, Hsing (28) also adoped similar echnique of coinegraion o find evidence of a J-curve for he Dominican Republic, Cosa Rica, El Salvador, Guaemala and Honduras. The sudy found evidence of a J-curve only for he Dominican Republic bu no for ohers. Similar mehod also used by Asfaha and Huda (22) o analyze coinegraion beween exchange rae misalignmen and inernaional rade compeiiveness for Souh Africa and by Bahmani-Oskooee (22) o invesigae he impac of exchange rae volailiy on he rade flows in Iran. In fac, many sudies which relaed o rade or exchange rae were using his mehod in heir analysis. Among all are Khan (25), Rahman and Mishra (992), Alse and Bahmani-Oskooee (995), Wong and Tang (27) and Bagchi e.al (24). This coinegraion es of Engle and Granger (987) assumes ha he adjusmen mechanism of he error correcion erm is symmeric, which indicaes ha he adjusmen coefficiens are similar regardless of posiive or negaive in he equilibrium error. For example, i is assumed ha he adjusmen speed of rade balance is he same no maer wha ype of exchange rae shocks occur. However, mos of he research addressing he issue of equilibrium has no aken ino accoun he asymmeric properies of adjusmen process in he dependen variable. Asymmery has been an imporan propery in recen macroeconomic analysis, wih a large number of sudies providing evidence of he asymmeric adjusmen of macroeconomic variables. In paricular Ukulu e.al (24), Holmes and Wang (25), Ghoshray (28), Yau and Nieh (28), Ewing e.al (26), Wang and Lin (25), Chang (28), Narayan (27), Cook (26), Heimonen (26), Chen e.al (25) and Shen e.al (27). Thus, no aking ino accoun recenly esablished evidence of asymmeric adjusmen of macroeconomic variables migh lead o incorrec inferences. As noed by Balke and Fomby (997), he movemen oward he long-run equilibrium is no necessarily consan. Thus, he presen sudy finds i is imporan o analyze he long-run equilibrium relaionship beween real exchange rae and rade balance, impors and expors demand by coinegraion ess assuming asymmeric adjusmen. The res of he paper is organized as follows: he nex secion provides heoreical framework of he sudy. Secion 3 presens he empirical mehods. Secion 4 highlighs he empirical findings and he analysis including he daa preliminaries. Finally, secion 5 concludes and draws policy recommendaions from he major findings. 2. THEORETICAL FRAMEWORK Theoreically, following he modeling inroduced by Rose and Yellen (989) and Rose (99), a counry s rade balance behaviour is buil ino a reduced form funcion direcly depending on he real exchange rae and he real domesic and foreign incomes. In fac, his funcion began wih a sandard model specificaion for expor and impor demand: 2

4 X η P.. E ( Y ) ε = () P γ ( Y ) π P. E M =. P (2) where X and M are he volume of expors and impors, E is he nominal exchange rae and P, P and Y, Y denoe he domesic and foreign price levels and incomes respecively; η and γ are he real exchange rae elasiciies for expors and impors, respecively and ε and π are he income elasiciies for expors and impors, respecively. Using logarihms, equaions () and (2) could be wrien as: ln X [ ln P ln P ln E ] ε lny = η + (3) ln M [ ln P + ln E ln P ] lny = γ + π (4) where ln e [ ln P + ln E ln P ] = is he naural logarihm of real exchange rae. In common pracice, rade balance (TB) is defined as he raio beween expors an d impors. Therefore, rade balance equaion could be wrien as: lntb = π lny + ε lny + θ ln e (5) where θ = - (η + γ). The coefficien of ln e indicaes wheher he Marshall-Lerner(ML) condiion is fulfilled. Here, η and γ are assumed o be negaive and ε and π are assumed o be posiive so ha ML holds whenever θ is posiive indicaing ha a higher real exchange rae, ha is, a real depreciaion, appears o improve he rade balance over ime. Our major concern is focused on analyzing he long-run equilibrium relaionship in impors demand, expors demand and rade balance by a coinegraion es assuming asymmeric adjusmen. We expec ha i is possible ha he adjusmen speeds of expors demand, impors demand and rade balance are no he same when differen ypes of exchange rae shocks occur. 3. EMPIRICAL APPROACH Following Enders and Siklos (2), he Engle-Granger wo sep coinegraion es is expanding o incorporae an asymmeric error correcion erm. Given wo series {y, x }, in he firs sep, he ordinary leas squares (OLS) is used o esimae he long-run equilibrium relaionship beween y and x ; hus: y = γ + γ x + ε (5) 3

5 where γ and γ are he esimaed parameers and ε is a disurbance erm. Possible coinegraion beween y and x is hen examined via he order of inegraion of he residuals ε from (5) using a Dickey-Fuller es as below: Δ ˆ ε = ρεˆ + υ (6) wih he appropriae degree of augmenaion employed via he inclusion of lagged values of he dependen variable. The null hypohesis of no coinegraion ( H : ρ ) is hen = formally esed via comparison of he -raio of he adjusmen parameer ρ and specifically generaed nonsandard criical values. However, he EG approach is misspecified if he ime series examined have an underlying asymmeric relaionship (Enders and Siklos, 2). Therefore, o es he saionariy of he disurbance erm by incorporaing he asymmeric adjusmen, Enders and Siklos (2) proposed he following model in he second sep: ˆ k ε + ( I ) ρ ˆ ε + δ iδ ˆ 2 ε i i= Δε = I ρ + ξ (7) where ρ, ρ 2 and δ I are coefficiens; ξ is a whie-noise disurbances; k is he number of lags; and I is an indicaor funcion such ha: I ifε = ifε < (8) Tong (983, 99) showed ha he leas squares esimaes of ρ and ρ 2 have an asympoic mulivariae normal disribuion. The coinegraion model, comprises equaions 5,7 and 8, is called he hreshold auoregressive (TAR) coinegraion model in Enders and Siklos (2). In his model, i is imporan o noe ha he indicaor funcion I depends on he level of ε - in equaion 8. Enders and Siklos (2) and Enders and Granger (998) suggesed an alernaive hreshold depending on he change in ε - in he previous period. Therefore, he new indicaor M is: M ifδε = ifδε < (9) This model, which comprises of equaion 5,7 and 9, is referred o as he momenumhreshold auoregressive (M-TAR) coinegraion model. In he above models, he value of hreshold (τ) is se equal o. In a case ha τ is unknown; Enders and Siklos (2) sugges use of a grid search procedure o derive a consisen esimae of hreshold. In specific, considering TAR model, he residual series { εˆ } is arranged in ascending order as{ ˆ ε < ˆ ε 2 <... < ˆ ε T }. Afer discarded he larges and smalles 5 percen of he { εˆ }, he cenral 7 percen of observaions of his sequence are hen considered in urn as hresholds in (7) and (8) as each of hem could be a possible hreshold. The esimaed 4

6 hreshold yielding he lowes residual sum of squares was deemed o be he appropriae esimae of he hreshold. A similar approach could be done for MTAR model. Using he cenral 7 percen of observaions of he sequence { Δ ˆ ε < Δ ˆ ε 2 <... < Δ ˆ ε T } considered as hreshold values for (9), he value which could provide minimum residual sum of squares resuling from he esimaion of (7) and (9) is hen defined as he consisen hreshold. The asymmeric coinegraion is hen examined as follows. Firs, i is deermined wheher y and x are coinegraed in he TAR and M-TAR models. The es for his is carried ou using F es for he null hypohesis of no coinegraion, H : ρ = ρ 2 =. The F saisics, however, has a non-sandard disribuion and is denoed as Φ by Enders and Siklos (2). Second, in he presence of asymmeric coinegraion, he null hypohesis H : ρ = ρ 2 can be esed using he sandard F-saisics. The evidence in suppor of asymmeric adjusmen of he error correcion erm is indicaed when boh H : ρ = ρ 2 = and H : ρ = ρ 2 are rejeced. Adjusmen is ρ if y - is above is long-run equilibrium value γ + γ x ), bu ρ 2 if y - is below. ( = The asymmeric error-correcion model also exiss for y and x when hey are formed in an asymmeric coinegraed relaionship. Tha is: Δ k k y = α + θm ε + θ2 ( M ) ε + α iδy i + α 2iΔx i + ξ i= i= () and Δ k k x = β + θ 2M ε + θ 22 ( M ) ε + β iδy i + β 2iΔx i + ξ 2 i= i= () where θ and θ 2 represen he speed of adjusmen coefficiens of y if y - is above and below is long-run equilibrium, respecively, similarly, θ 2 and θ 22 represen he speed of adjusmen coefficiens of x of he wo regimes, respecively, α and β are consan erms, α i, α 2i, β i and β 2i are coefficiens of lagged change erms, and ξ and ξ 2 are whie-noise disurbances. The Granger causaliy es could be applied o examine he lead-lag relaionship beween y and x. The null hypohesis ha x does no lead y is H : α 2i =, i =,..,k and he null hypohesis ha y does no lead x is H : β i =, i =,..,k. 4. EMPIRICAL RESULTS AND ANALYSIS Daa descripions and uni roo ess All series examined in his sudy volume of expors (X), volume of impors (M), rade balance (TB) and real effecive exchange rae (REER) - are colleced from he IMF Saisics and Bank Negara Malaysia (BNM) Bullein. The daa is monhly from M: 999 o M2: 26. As for exchange rae, he indicaor used is real effecive exchange rae index wih he base year of 2. Boh volumes of expors and impors are also in indices wih 999 as he base year and rade balance is simply he raio of volume of 5

7 expors o volume of impors. All hese variables are ransformed ino naural logarihm and denoed wih ialic small leers. These variables are firs checked for heir uni roo properies using he sandard augmened Dickey-Fuller (ADF) and Kwiakowski-Phillips-Schmid-Shin (KPSS) uni roo ess. While he ADF has non-saionary null hypohesis, he KPSS es saes saionary as he null hypohesis. Resuls of hese ess are displayed in Table. The resuls generally sugges ha all variables are inegraed of order one. In oher words, he variables are non-saionary in level bu saionary a firs difference or I(). ADF es saisic (wih rend and inercep) Variable Level Firs Table : Uni Roo Tess Level KPSS es saisic (wih rend and inercep) Firs Difference Difference b x m reer Noe:, and denoe significance a %, 5% and % level, respecively. Long-run relaions In he presen analysis, he following funcions are considered for long-run relaionship beween exchange rae and rade variables: Model : Model 2: Model 3: b reer x reer m reer = α + α + ε (2) = β + β + ε (3) = σ + σ + ε (4) Model esablishes he link beween real exchange rae and rade balance. The link beween real exchange rae and expors demand and beween real exchange rae and impors demand are esablished in Model 2 and Model 3, respecively. The long-run relaions beween real exchange rae and rade variables are displayed in Table 2. Variable Equaion/ Model Table 2: Long-run equaions Dependen Variables () (2) Ln Trade Ln Expors (x) Balance (b) (3) Ln Impors (m) consan 2.69 (2.74) 7.47 (8.55) 4.89 (6.22) Ln Real Effecive Exchange Rae (reer) -.59 (-2.78) (-6.8) -2.8 (-4.8) 6

8 Included observaion Adjused R F-saisic Diagnosic es: Far Farch JBnormal Fhe Noes:. -saisic in parenheses 2. Far is he F-saisic of Breusch-Godfrey Serial Correlaion LM Tes Farch is he F-saisic of ARCH Tes JBnormal is he Jarque-Bera Saisic of Normaliy Tes Fhe is he F-saisic of Whie Heeroskedasiciy Tes 3. significan a % level significan a 5% leve significan a % level. Prior o es he exisence of asymmeric coinegraion in he models, we conduc he radiional wo-sep coinegraion es due o Engle and Granger (987). Base on equaion (6), Table 3 presens he resuls of hese ess. Table 3: Engle-Granger ADF coinegraion ess Criical values Model -saisic % 5% % (b) (x) (m) The resuls of E-G coinegraion ess reveal no long-run relaion beween real exchange rae and expors demand in model 2 and beween real exchange rae and impors demand in model 3 as he null hypohesis of no coinegraion is no rejeced a % and 5% significan levels. However, here is long-run relaion beween real exchange rae and rade balance in models since he null hypoheses of no coinegraion is rejeced a % and 5% levels of significance. Though here is no coinegraion exised in model 2 and 3 base on symmeric E-G coinegraion ess, here migh be a possibiliy of uncovered asymmeric coinegraions in he models, which need o be explored furher. For his purpose, furher analysis using TAR and M-TAR models are conduced for all models, 2 and 3. The resuls from hreshold coinegraion analysis are repored in Table 4. Table 4: Enders-Siklos asymmeric coinegraion ess H : ρ = ρ 2 = H : ρ = ρ 2 TAR: Φ k M-TAR: Φ k TAR: F es M-TAR: F es Model (b) Model 2(x) Model 3(m) Noes: The noaion k is he lag periods of lagged difference erm, which is decided by he minimum AIC. The symbols, and indicae significance a he, 5 and % levels, respecively. The criical values of Φ and Φ saisics are given in Enders and Siklos (2). F indicaes F-saisic for he null hypohesis of symmeric adjusmen, ρ = ρ 2. 7

9 From Table 4, using model, i is found ha here exiss asymmeric coinegraion beween balance of rade and real exchange rae when M-TAR model is conduced as he Φ saisic and F-saisic of Wald coefficens ess are significan a percen and 5 percen levels, respecively. Using model 3, i is also found asymmeric coinegraion beween expor volume and real exchange rae under TAR model as Φ saisic and F-saisic of Wald coefficens ess are significan a percen and 5 percen levels, respecively. Threshold error-correcion models Given he presence of asymmeric coinegraions beween rade balance and real exchange rae and beween impor volume and real exchange rae, we esimae hreshold and momenum-hreshold error correcion models o assess is dynamic in he shor-run. We se he maximum lag order of firs differenced variables o 2. Then we rim he lag order down if he las lag is found o be insignifican using % significan level. Table 5 and Table 6 presen resuls respecively for M-TAR (rade balance model) and TAR (impor model) models. Boh models are diagnosed for robus evidence. Noed from he ables, he esimaed models are free from problems of non-normaliy, auocorrelaion, ARCH effecs and heeroskedasiciy as indicaed by Jarque-Bera es for normaliy, Breusch-Godfrey LM es for serial correlaion, Engle s es for ARCH effecs and Whie Heeroskedasiciy es. Table 5: Momenum Threshold Auoregressive (M-TAR) Error Correcion Model for rade balance Equaion Ind. Variable Dependen Variable (M-TAR) b consan -. M ε M ) ε ( b b b b -4.4 b b -6.3 b reer reer reer reer reer reer reer Adjused R F-saisic

10 Diagnosic es: Far Farch JBnormal Fhe Noes:. Far is he F-saisic of Breusch-Godfrey Serial Correlaion LM Tes Farch is he F-saisic of ARCH Tes JBnormal is he Jarque-Bera Saisic of Normaliy Tes Fhe is he F-saisic of Whie Heeroskedasiciy Tes 2., and denoe significance a %, 5% and % level, respecively. Table 6: Threshold Auoregressive (TAR) Error Correcion Model for impor demand Equaion Ind. Variable Dependen Variable (TAR) m consan -.7 I ε.3 ( ) I ε m m m -3.5 m m m -6.3 m m m m m m reer reer reer reer reer reer reer reer reer reer reer reer Adjused R F-saisic Diagnosic es: Far Farch JBnormal Fhe

11 Noes:. Far is he F-saisic of Breusch-Godfrey Serial Correlaion LM Tes Farch is he F-saisic of ARCH Tes JBnormal is he Jarque-Bera Saisic of Normaliy Tes Fhe is he F-saisic of Whie Heeroskedasiciy Tes 2., and denoe significance a %, 5% and % level, respecively. From he esimaion of M-TAR error-correcion rade balance model, i can herefore be concluded ha here exiss a long-run coinegraing relaionship beween real exchange rae and rade balance wih he underlying adjusmen process being highly asymmeric. In specific, he value of he adjusmen parameers indicae ha when real exchange rae and rade balance emporarily depar from heir underlying equilibrium relaionship, adjusmen back o equilibrium is more rapid following relaive increase in rade balance (above long-run value) compared o relaive decrease in rade balance (below long-run value). This could be illusraed as follows:.589[ b reer Δb = K ], for ˆ ε > (5).442[ b reer Δb = K ], for ˆ ε < (6) where K represens oher erms (i.e. consan and lagged changes in impors and real exchange rae) in equaion. The M-TAR specificaion showed ha reversion o an underlying equilibrium relaionship is faser, wih 59% speed of adjusmen, when emporary deparures from i are caused by relaive increases in rade balance, or equivalenly, decreases in real exchange rae. However, he reversion o he underlying equilibrium is only wih 44% speed of adjusmen when he emporary deparures from i are caused by relaive decreases in rade balance, or equivalenly, increases in real exchange rae. The inferences from he ess reflec he evidence of persisence of rade balance defici in he case of Malaysia as he rade balance adjusmen o is long-run value is slower when i faces defici han when i faces surplus. The concern is ha a long-lasing rade defici can lead o foreign deb, on which he counry has o pay ineress. If he deb is judged as unsusainable, a currency crisis is afraid could be eruped. Hisorically, Malaysia did face decreases in world commodiy prices, a curren accoun defici and an overvalued real exchange rae in he early 98s. However, he counry had a much more successful adjusmen and embarked on a decade of rapid growh. Despie declining of commodiy and oil prices in 98 and he erm of rade reversals which cos he counry real income declined dramaically in 982, he governmen mainained is fiscal expansion, relying on foreign borrowing o finance growing governmen deficis. In fac, saring in 984, he governmen embarked an adjusmen program which cu governmen spending o reduce he defici and depreciaed he nominal exchange rae and reduced exernal borrowing o resore exernal compeiiveness. Combined wih lower domesic inflaion, he policies led o real depreciaion beween 985 and 987 which reurn he curren accoun ino surplus. Since he presen sudy finds new evidence of persisence rade defici wihin 99 unil 26 (more or less he presen period) probably due o policies o defend an overvalued exchange rae by proecionis rade policies or capial conrols, i is expeced ha similar adjusmen program could be implemened o resore growh of he counry despie a series of crises encounered.

12 Looking a TAR error-correcion impor demand model, he model suggess quick adjusmen of impor demand once i is below long-run value. The model provides no evidence for impor demand adjusmen when i is above long-run value. An illusraion for his, we have:.326[ m reer Δm = K ], for ˆ ε < (7) where K represens oher erms (i.e. consan and lagged changes in impors and real exchange rae). The esimaed error correcion coefficien suggess ha 32% of lasperiod deviaion of impors from is long-run value will be correced by impors adjusmen. In paricular, he values of he adjusmen parameer indicae ha when real exchange rae and impors emporarily depar from heir underlying equilibrium relaionship, adjusmen back o equilibrium is more rapid and significan following a relaive decrease in impors or equivalenly, an increase in real exchange rae. On he oher hand, he adjusmen of impors is found o be insignifican when i is above is long-run value. This indicaes ha he shock of exchange rae on impor demand is likely o be emporary in naure. In specific, increase in real exchange rae only reduces impors emporarily and herefore non-persisence while he impac of depreciaion is found o be insignifican. Again, his reflecs he weaknesses of overvalued exchange raes. Worldwide experience has shown ha defending he exchange rae has no medium-run benefis and i hurs he economy and growh. In facs, an overvalued exchange rae is ofen he roo cause of proecion and he counry will be unable o reurn o he more liberal rade policies ha allow growh and inegraion ino he world rading communiy wihou exchange rae adjusmen (Shaz and Tarr, 2) 5. CONCLUSION The effecs of exchange rae shock on rade balance, impors and expors are ofen examined using a modeling approach. In he area of inernaional rade, large number of sudies widely used coinegraion analysis o invesigae he inerdependence beween variables. One of coinegraion echniques applied is adoped from Engle and Granger (987). This coinegraion es of Engle and Granger (987) assumes ha he adjusmen mechanism of he error correcion erm is symmeric, which indicaes ha he adjusmen coefficiens are similar regardless of posiive or negaive in he equilibrium error. However, asymmery has now been an imporan propery in macroeconomic analysis, wih a large number of sudies providing evidence of he asymmeric adjusmen of macroeconomic variables. The presen sudy aemps o analyze he long-run equilibrium relaionship beween real exchange rae and rade balance, impors and expors demand by coinegraion ess assuming asymmeric adjusmen. By adoping Enders-Siklos asymmeric coinegraion ess, i is found ha here exiss asymmeric coinegraion beween balance of rade and real exchange rae when M-TAR model is conduced and he sudy also found asymmeric coinegraion beween expor volume and real exchange rae under TAR model. From he esimaion of M-TAR error-correcion rade balance model, i can be concluded ha here exiss a long-run coinegraing relaionship beween real exchange rae and

13 rade balance wih he underlying adjusmen process being highly asymmeric. In specific, he value of he adjusmen parameers indicae ha when real exchange rae and rade balance emporarily depar from heir underlying equilibrium relaionship, adjusmen back o equilibrium is more rapid following relaive increase in rade balance (above long-run value) compared o relaive decrease in rade balance (below long-run value). As for TAR error-correcion impor demand model, he model suggess quick adjusmen of impor demand once i is below long-run value. The model provides no evidence for impor demand adjusmen when i is above long-run value. The resuls reflec he evidence of persisence of rade balance defici in he case of Malaysia as he rade balance adjusmen o is long-run value is slower when i faces defici han when i faces surplus. This is probably due o policies o defend an overvalued exchange rae by proecionis rade policies or capial conrols. Moreover, he shock of exchange rae on impor demand is likely o be emporary in naure, in which, increase in real exchange rae only reduces impors emporarily and herefore non-persisence while he impac of depreciaion is found o be insignifican. Similarly, his reflecs he weaknesses of overvalued exchange raes. To avoid negaive implicaions of he overvaluaion of exchange rae, i is recommended ha an adjusmen program be implemened o resore growh of he counry as wha had been done previously and successfully in 98s. REFERENCES Alse, J. & Bahmani-Oskooee, M. (995). Do devaluaions improve or worsen he erms of rade?. Journal of Economic Sudies. Vol.22, no. 6: Arize, A.C.(994). Coinegraion es of a long-run relaion beween he real effecive exchange rae and he rade balance. Inernaional Economic Journal. Vol. 8, issue 3: -9. Asfaha, S. & Huda, S. (22). Exchange rae misalignmen and inernaional rade compeiiveness: A coinegraion analysis for Souh Africa. TIPS Forum 22: Global Inegraion, Susainable Developmen and The Souhern African Economy. Bagchi, D., Chorareas, G.E. & Miller, S.M.(24). The real exchange rae in small, open, developed economies: Evidence from coinegraion analysis. Economic Record. Vol. 8: Bahmani-Oskooee, M.(22). Does black marke exchange rae volailiy deer he rade flows? Iranian experience. Applied Economics. Vol. 34, no. 8: Balke, N.S. & Fomby, T.B. (997). Threshold coinegraion. Inernaional Economic Review 38: Bank Negara Malaysia. Monhly Saisical Bullein. Various issues. Chang, S.C. (28). Asymmeric coinegraion relaionship among Asian exchange raes. Economic Change and Resrucuring. Vol. 4, no. 2: Chen, L.H., Finney, M & Lai, K.S.(25). A hreshold coinegraion analysis of asymmeric price ransmission from crude oil o gasoline prices. Economics Leer 89:

14 Cook, S.(26). Are sock prices and economic aciviy coinegraed? Evidence from he Unied Saes, Annals of Financial Economics 2: 2-6 Enders, W. & Granger, C.W. (998). Uni-roo ess and asymmeric adjusmen wih an example using he erm srucure of ineres raes. Journal of Business and Economic Saisics 6: 34-3 Enders, W. & Siklos, P.L. (2). Coinegraion and hreshold adjusmen. Journal of Business and Economic Saisics 9: Engle, R.F. & Granger, C.W.J. (987). Coinegraion and error correcion: Represenaio, esimaion and esing. Economerica 49: Ewing, B.T., Payne, J.E., Thompson, M.A., Al-Zoubi, O.M. (26), Gevernmen expendiures and revenues: Evidence from asymmeric modeling. Souhern Economic Journal (hp:// accessed on 9 February 29) Ghoshray, A. (28). Asymmeric adjusmen of rice expor prices: The case of Thailand and Vienam. Journal of Applied Economics 5(2): 8-9 Heimonen, K. (26). Nonlinear adjusmen in PPP-evidence from hreshold coinegraion. Empirical Economics. Vol 3, no. 2, Holmes, M.J. & Wang, P. (25). Do African counries move asymmerically owards purchasing power pariy?. Souh African Journal of Economics. Vol.73, no Hsing, Y. (28) Tes of he J-curve for he DR-CAFTA counries and policy implicaion. Research in Inernaional Business and Finance. Aricle in Press. Correced Proof. Inernaional Moneary Fund. IMF Saisics. Various issues Khan, H. (25). Tourism and rade: Coinegraion and Granger causaliy ess. Journal of Travel Research. Vol. 4, no. 2: Narayan, P.K. (27). Are nominal exchange raes and price levels co-inegraed? New evidence from hreshold auoregressive and momenum-hreshold auoregressive models. Economic Record. Vol 83, no.26: Rahman, M. & Mishra, B. (992)Coinegraion of U.S. budge and curren accoun deficis: Twins or srangers?. Journal of Economics and Finance. Vol. 6, no. 2:9-27 Rose, A.K. (99). Exchnage raes and he rade balance: Some evidence from developing counries. Economic Leers, 34: Rose, A.K. & Yellen, J.L. (989). In here a J-curve?. Journal of Moneary Economics, 24:

15 Shaz, H.J. & Tarr, D.G. (2). Exchange rae overvaluaion and rade proecion: Lesson from experience. Policy Research Working Paper 2289, The World Bank Shen, C.H., Chen, C.F. & Chen, L.H.(27). An empirical sudy of he asymmeric coinegraion relaionships among he Chinese sock markes. Applied Economics. Vol. 39, no. : Tong, H. (983). Threshold models in nonlinear ime-series analysis. Springer-Verlag, New York. Tong, H. (99). Nonlinear ime-series: A Dynamical approach. Oxford Universiy Press, Oxford Ukulu, U., Seymen, D. & Ari, A. (24) Expor supply and rade reform: The Turkish evidence. Inernaional Conference on Policy Modeling, Paris, June 24. Wang, C.H. & Lin, C.H.A. (25). Using hreshold coinegraion o examine asymmeric price adjusmens beween ADR s and heir underlying securiies- The case of Taiwan. Souh African Journal of Economics. Vol. 73, no. 3: Wong, K.N. & Tang, C.T. (27). Foreign direc invesmen and elecronics expors: exploraory empirical evidence from Malaysia s op five elecronics expors. Economic Bullein. Vol. 6, no.4: -8 Yau, H.Y. & Nieh, C.C. (28). Tesing for coinegraion wih hreshold effec beween sock prices and exchange raes in Japan and Taiwan. Japan and World Economy. Aricle in Press. Correced Proof. 4