Abstract
This paper aims to analyse the trade behaviour of four selected ASEAN countries (based on their export/import products) by using a co-integration analysis. The demand for exports and imports are estimated for the period before the currency crisis erupted ( 1963 -1995 ), using the dynamic OLS (DOLS) method. The Johansen Maximum Likelihood (JML) approach is also employed to compare the results obtained. The results show that foreign income has a significant impact on export demand, suggesting that foreign disturbance in the form of economic activities is likely to be transmitted to these countries. The Marshall Lerner conditions are easily met for the case of Malaysia and Thailand (DOLS and JML). For Indonesia and the Philippines, the sum of the price elasticities of exports and imports demands are less than unity, this can be explained by the J-curve, in which the currency depreciation will first worsen the trade balance before it improves and it takes time to affect the trade balance.
Highlights
The literature has quite extensively dealt with the estimations of the price and income elasticities of exports and imports demand
One way to tackle this problem is by using the dynamic OLS method in which lagged and leading values of the first differences of the I (1) variables are included
Iii) The findings of this study provide empirical evidence that suggests that the exchange rate policy (i.e. Malaysia and Thailand) is effective to correct the trade balance deficit as the Marshall-Lerner condition is met
Summary
The literature has quite extensively dealt with the estimations of the price and income elasticities of exports and imports demand. The models mostly use a simple OLS method to estimate the price and income elastic ties of exports and imports demand. The problem with this time series analysis is that we cannot draw general conclusions from the results of a particular time series analysis as the estimated parameters in the static OLS are subject to bias in small samples since the lagged terms are ignored The Johansen Maximum Likelihood approach can be used as it provides direct estimates of the cointegrating vectors and allows testing the number of cointegrating vectors. A strategy is to use both these approaches and compare the results
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