COMPREHENSIVE APPROACH TO THE J-CURVE THEORY BETWEEN MALAYSIA AND ITS MAJOR THREE ASIAN TRADE PARTNERS

Abstract

Among many theories on the impact of exchange rate movements on trade balance, the J-Curve Theory gained most of the attention. The theory claims that the impact of exchange rate on trade is time-dependent. This current study criticizes the literature on the theory because of its incomprehensiveness and its inability to examine whether the impact of exchange rate depreciation is more related to the nature of trade commodities or due to the circumstances of bilateral trade relations. This study investigates the J-Curve Theory between Malaysia and each of China, Singapore, and Japan for 20 trade sectors over the period 1987-2016. We find that the impact of exchange rate movements on trade balance is largely dependent on the nature of traded sectors as well as the trade partner-specific economic circumstances.