Commodity exports and macroeconomic performance : the case of palm oil in Malaysia

The objective of this paper is to contribute towards understanding the effects of palm oil production upon key macroeconomic variables in Malaysian economy. A dynamic general equilibrium model was employed in order to analyze the dynamic macroeconomic adjustment processes arising from palm oil production increase for Malaysian economy (the second biggest palm oil producer in world), operating under a managed float exchange rate regime. The model utilized in this paper is likely to be of interest to other palm oil-exporting economies with similar features such as that of Indonesia. Findings from this paper show that an increase in palm oil production would potentially result in an increase in private capital stock, private sector wealth, real income, public capital stock, human capital stock and non-palm oil output supply and demand. However, the revenue arising from the palm oil sector also has the potential to deteriorate the non-palm-oil trade balance through a slight loss of competitiveness from a real exchange rate appreciation.