THE EFFECTS OF OIL PRICE AND EXCHANGE RATE ON TRADE BALANCE: EVIDENCE FROM INDONESIA AND KOREA

Heon-Yong Jung (2016) The Effects Of Oil Price And Exchange Rate On Trade Balance: Evidence From Indonesia And Korea

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ABSTRACT

This study investigates the effects of oil price and exchange rate on trade balance of Indonesia and Korea using monthly time series data covering the period between 2000 and 2015. We employ EGARCH (1,1) - GED model which allows the positive and negative shocks t o have asymmetric influences on volatility. The Johansen co - integration test was applied and found the long run relationship between oil price, exchange rate and trade balance does exist. With respect to Indonesia as one of oil exporting countries, we foun d that an increase in oil prices leads to a declined trade balance as imports rose more than exports. Appreciation in IDR also leads to a declined trade balance as exports fell more than imports. For Korea as one of oil importing countries, an increase in oil prices leads to an improved trade balance as exports rose more than imports. Appreciation in KRW leads to a declined trade balance as exports fell more than imports. And oil price volatility reduced trade balance both in Indonesia and Korea. Oil prices have negative effects on Indonesia‟s trade balance and positive effects on Korea‟s trade balance. Indonesian and Korean currency appreciation against US dollar have a negative impact on trade balance in Indonesia and Korea respectively. This information w ill contribute to Indonesian and Korean government in making policies for their trade.

Keywords : Oil Price, Real Effective Exchange Rate, Trade Balance, Oil Exporters, Oil Importers, EGARCH(1,1) - GED model