The lead-lag relationship between the rubber price and inflation rate: an evidence from Malaysia

The objective of this paper to study the causality between inflation and rubber price in Malaysia. This study is the first attempt to investigate the causality by applying Auto Regressive Distributive Lag (ARDL) model which has taken care of a major limitation of the conventional co-integrating tests which suffer from pre-test biases between the variables. Error Correction Model (ECM) using ARDL approach, Variance Decompositions (VDC) technique and Impulse Response Functions (IRF) are also applied to test the exogeneity and endogeneity of the variables and reaction of these variables when a shock is imposed on them. The data used in this study are monthly data from Datastream comprising of inflation rate (CPI as the proxy), Malaysian rubber price: SMR20 and SMR10, Thailand rubber price, US synthetic rubber price and exchange rate. From the study, it is noted that inflation leads the Malaysian rubber price, Thailand rubber price, synthetic rubber price and exchange rate, respectively. This has an important policy implication for the national policy makers and rubber regulators in developing rubber industry in Malaysia