Abstract

This paper examines the impact of exchange rate risk on the exports of palm oil in the era of recurring financial crises and global economic instability. The exchange rate risk is captured by misalignments in the real bilateral US/RM exchange rate.  This paper is divided into two parts. First, the incidence of exchange rate misalignment is observed using price-based approach (purchasing power parity) and model-based approach [behavioural equilibrium exchange rate (BEER)]. Next, the estimated exchange rate misalignment is used as a variable in the export model to capture the impact of risks. The long run estimates suggest that exchange rate misalignments affect palm oil exports in a negative manner. Then, the estimated misalignments are segregated into events of overvaluation and undervaluation to further comprehend their individual impact.  Results suggest that in the long run, overvaluation has a significant negative impact on palm oil exports. The opposite however, could not be construed in the case of undervaluation which indicates asymmetries in the impact of overvaluation and undervaluation of the exchange rate on palm oil exports. Hence, it is imperative that policy-makers avoid both overvaluation and undervaluation and keep the real exchange rate in line with the economic fundamentals.

Keywords:  Exchange rate misalignment, overvaluation, undervaluation, palm oil exports.

Abbreviation

GDP, Gross domestic product; ARDL, autoregressive distributed lags; OLS, ordinary least squares; PPP, purchasing power parity; BEER, behavioural equilibrium exchange rate; CPI, consumer price indices; PPI, producer price indices; FEER, fundamental equilibrium exchange rate; DEER, desired equilibrium exchange rate; PEER, permanent equilibrium exchange rate; CHEER, capital-enhanced equilibrium exchange rate; IFS, International Financial Statistics.