Oil price shocks and trade

Abstract: This study aims to examine the effects of oil price shocks on the overall trade- and the non-oil trade balances for ten oil-importing Euro area countries. Theory suggests that the effects from an oil price shock on the oil component of the trade balance for oil importers is negative, but that the effect on the non-oil component is positive. Thus, the effect on the overall trade balance is ambiguous. When studying the relationship between the price of oil and trade, the Euro area is often considered as a homogeneous group and the results are presented at an aggregate level. The different economic structure and proneness to adjust to shocks among the countries motivate a study on an individual level. Using a data-set, spanning from 1980Q1 to 2014Q4, we set up an unrestricted Vector Autoregressive (VAR) model to perform Granger causality tests, Impulse Response Functions (IRF:s) and variance decomposition analysis. The causality tests show that the price of oil only causes the non-oil trade balance. Moreover, the IRF:s indicate that the Euro area countries’ non-oil trade balances respond similarly to oil price shocks. However, the results for the overall trade balances are mixed, indicating that there are discrepancies between the countries. Further, by dividing the sample we investigated the proposition that the role of oil has declined during the last decades, this hypothesis could not be confirmed for all countries.