Do the time-varying effects of oil prices affect the trade balances of ASEAN-5 countries?

ABSTRACT

This study investigates the effects of oil price shocks on five Association of Southeast Asian Nations (ASEAN-5) trade balances by employing a time-varying parameter vector autoregression model with stochastic volatility (TVP-VAR). The time-varying responses derived from this model indicate that the impacts of oil price shocks vary significantly across economies due to their distinct characteristics in the oil market. The results also demonstrate the significant time-varying impact of economic activity and the real exchange rate on the trade balances of the five countries. The time-varying responses show that the effects of oil prices on trade balances are more pronounced during global and local economic events. Our findings have important policy implications for each country to avoid the risks associated with fluctuations in oil prices.

KEYWORDS:

• Oil price shocks
• trade balance
• TVP-VAR
• ASEAN-5

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ Table 1 summarizes the findings of the studies that examined the effects of oil price shocks on the external balance.

² ASEAN currently contains ten member states: Brunei Darussalam, Burma, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Vietnam. However, owing to the lack of quarterly data with a longer time span for the remaining nations, our analysis focuses on the group of five countries that first established ASEAN.

³ According to Cogley and Sargent (2008), in order to avoid explosive autoregressive roots in parameter estimates, the variables in the TVP-VAR model should be stationary.

⁴ To save space, the results of the linear unit root test are not presented here but are available on request from the corresponding author.

⁵ The Akaike Information Criterion (AIC) was used to determine the optimal number of lags in the VAR model.

⁶ To compare the impact of shocks through time, the responses were generated by setting an initial shock size equal to the time-series average of stochastic volatility during the estimation period, as suggested by Nakajima (2011).

⁷ Figure A1 also shows the linear responses of the trade balances obtained from the linear VAR model for ASEAN-5 countries. The graphs indicate that differences in the linear responses across the samples suggest that local and global events experienced at that time had a remarkable effect on the magnitude of the responses. Therefore, one can conclude that time-invariant VAR estimates may not be an appropriate tool for analyzing the relationship between the trade balance and oil price shocks.

⁸ In 2020, Singapore had the highest net export to GDP ratio among the ASEAN-5 countries, at 31.92%, followed by Malaysia at 6.44%. Figure A2 in the appendix provides more information.