Oil price shocks and trade imbalances

This study aims to examine whether a large part of the variability of trade balances and their oil and non-oil components is associated with oil price fluctuations. The long-run causality running from oil price to overall, oil and non-oil trade balances and their short-run dynamics are investigated by applying the Toda and Yamamoto, 1995 (TY) causality approach and generalized impulse response functions (IRFs), respectively to the monthly data spanning from January 1999 to November 2011. Three Asian economies that represent three distinct characteristics in terms of oil are chosen and examined: Malaysia as an oil exporter, Singapore as an oil refinery and Japan as an oil importer. The stability of the causality is also checked and the estimated impulse responses across different periods are examined. The results have implications for both policy makers and economic modeling of the impact of oil price shocks. (C) 2012 Elsevier B.V. All rights reserved.