Palm oil export : is it price led or exchange rate led? evidence from Malaysia

Economic theory suggests that in a closed economy, the quantity demanded is sensitive to price and in an open economy, it is also sensitive to exchange rate. However, the theory can’t clearly tell us which variable is relatively the driver and which variable is the follower in the context of dynamic interdependence of the variables. We need to apply the dynamic time series techniques to obtain the relative lead-lag position between these variables. Malaysia is used as a case study. Findings suggest that in the long run, variables under study are theoretically related as evidenced in their being cointegrated. In addition, based on the generalized variance decompositions technique, the findings tend to suggest that exchange rate is the most exogenous variable followed by palm oil price and export volume. This is an important finding which is intuitive and does contain strong policy implications