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Testing for Marshall-Lerner Condition: Bilateral Trades between Malaysia and Trading Partners

Siok Kun Sek 1 and Wai Mun Har 2
1. School of Mathematical Sciences, Universiti Sains Malaysia, Penang CO 11800 Malaysia
2. Faculty of Accountancy and Management, Department of Economics, UTAR, Selangor CO 11800 Malaysia
Abstract—In this paper, empirical approaches are applied to test the validity of Marshall-Lerner condition, i.e. if devaluation in real exchange rate helps to improve the trade balance of domestic country. The analyses are focused on five pairs of bilateral trades between Malaysia and its main trading partners of China, EU, Japan, Singapore and U.S. respectively. Applying the Least Square and Fully Modified Least Square approaches, our results fail to show the validity of Marshall-Lerner condition in all five pairs of bilateral trades. However, our results show that higher income level of trading partners may lead to improvement in the trade balance of domestic country.

Index Terms—trade balance, exchange rate devaluation, Marshall-Lerner condition, cointegration

Cite: Siok Kun Sek and Wai Mun Har, "Testing for Marshall-Lerner Condition: Bilateral Trades between Malaysia and Trading Partners," Journal of Advanced Management Science, Vol. 2, No. 1, pp. 23-28, March 2014. doi: 10.12720/joams.2.1.23-28
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