Effects of palm oil price on exchange rate: a case study of Malaysia and Indonesia

This paper investigates the impact of palm oil prices onexchange rates inMalaysia and Indonesia usingtheDynamicOrdinary Least Squares(DOLS)model.Thepaper uses real monthly data from 1983:1 to 2015:5 andfollows three estimation steps:(i) determination of the integrational properties of the data, (ii) testing for cointegrationrelationship through bounds testing method, and (iii) estimating the long run impact ofreal palm oil price, real crude oil price and real interest rate differential on realexchange rate. The finding indicates that real palm oil prices have significant negativeeffects on real exchange rate. While coefficient estimates differ for Malaysia andIndonesia, however, they tend to be around 0.2. In other words, a 10% increase in thereal price of palm oil leads to appreciation of about 2% in the equilibrium exchangerate in Malaysia and Indonesia.The findings confirm that an increase in palm oil priceleads to exchange rate appreciation