Oil Palm Industry Economic Journal Vol. 5 (2) September 2005 p. 11-22

Supply Response of Malaysian Palm Oil Producers: Impact of Interest Rate Variations

Mohammad Alias and Tuck Cheong Tang
Received:    Accepted:    Available Online:


This paper examines the long run relationship between the supply of Malaysian palm oil and its determinants using Johansen multivariate cointegration analysis. The supply response of Malaysian oil palm producers is investigated using annual data from 1967 to 2002. An error correction model is proposed to investigate the short run response of supply to its determinants. Supply of palm oil is postulated to be a function of expected price of palm oil relative to the expected price of rubber (the substitute crop); government expenditure, a proxy for government policy; a time trend variable to represent technological change or preference and interest rate to represent the cost of borrowing. Previous studies have not included the interest rate variable. Naïve expectations model is used to model price expectations. Structural information, in particular, the gestation period for oil palms from first planting is used in the specification of the long run relationship.

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