Analyzing the nexus between foreign trade and economic growth in Djibouti through the application of a VAR model (1989-2021)

Abstract

Purpose- Economic growth and foreign trade are among the most important macroeconomic objectives of all countries in the world. The concept of foreign trade is considered as the engine of economic growth, consisting of imports and exports. Therefore, countries engage in commercial relations with other countries through economic policies tailored to their own economic and political situations. Since there are few studies on the economy of Djibouti, this study investigates the Djiboutian economy using the variables of growth, imports, and exports. The study aims to identify the degree to which foreign trade has affected economic growth in Djibouti, as well as to analyze the short-term and long-term dynamics of this relationship. Methodology-This study employs a Vector Autoregression (VAR) model to investigate the nexus between foreign trade and economic growth in Djibouti over the period of 1989-2021. The data used in this study is sourced from the Organisation of Islamic Cooperation (OIC) database, which provides extensive information on Djibouti's foreign trade and economic indicators. Findings- The findings indicate that foreign trade has a strong positive impact on economic growth in Djibouti, underscoring the critical role of foreign trade in driving the country's economic performance. Conclusion-This study is significant as it adds to the limited literature on the relationship between foreign trade and economic growth in Djibouti, offering policymakers and stakeholders valuable insights into the significance of foreign trade in promoting economic development in the country. These results could guide the development and implementation of policies aimed at promoting and sustaining foreign trade, leading to further growth and development of the Djiboutian economy. Keywords: Economic growth, foreign trade, VAR Model, Djibouti. JEL Codes: F10, O41, C31