Effects of Palm Oil Price on Exchange Rate: A Case Study of Malaysia and Indonesia
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Abstract
This paper investigates the impact of palm oil prices on exchange rates in Malaysia and Indonesia using the Dynamic Ordinary Least Squares (DOLS) model. The paper uses real monthly data from 1983:1 to 2015:5 and follows three estimation steps: (i) determination of the integrational properties of the data, (ii) testing for cointegration relationship through bounds testing method, and (iii) estimating the long run impact of real palm oil price, real crude oil price and real interest rate differential on real exchange rate. The finding indicates that real palm oil prices have significant negative effects on real exchange rate. While coefficient estimates differ for Malaysia and Indonesia, however, they tend to be around 0.2. In other words, a 10% increase in the real price of palm oil leads to appreciation of about 2% in the equilibrium exchange rate in Malaysia and Indonesia. The findings confirm that an increase in palm oil price leads to exchange rate appreciation.
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