Impact of Exchange Rate Shock on Prices of Imports and Exports

Abstract

This study examines the significant impact of exchange rate shock on prices of Malaysian importsand exports. In methodology, the study adopts vector error correction (VECM) model using monthlydata of nominal exchange rates, money supply, prices of imports and prices of exports covering theperiod of M1:1999 to M12:2006. For further analysis, we adopt an innovation accounting bysimulating variance decompositions (VDC) and impulse response functions (IRF). VDC and IRFserve as tools for evaluating the dynamic interactions and strength of causal relations amongvariables in the system. In fact, IRF is used to calculate the exchange rate pass-through on importprices and export prices. The findings indicate that, while the exchange rate shock is significantlyaffect the fluctuation of import prices, the degree of pass-through is incomplete.JEL Classification: C51, F10, F30