Dynamic Perspective of Trade Balance: Evidence from Southeast Asia before the Global Financial Crisis of 2008

Abstract

Objective - This paper studies the influence of some determinants of trade balance for Southeast Asia countries in dynamics perspective before the global financial crisis of 2008. Methodology/Technique - Based on quarterly data (1980q1 to 2007q3), the investigation is carried out using VECM. Findings - The results show that in the long run: (i) income effect is found to be dominant in determining the change in trade balance; (ii) the cash balance effect does influence bilateral trade; (iii) bilateral trade is affected by exchange rate movements. Further, the effect of small economies are suspected to be present in Southeast Asia region. Meanwhile, in the short run: (i) the cash balance effect plays a major role in influencing trade balance improvement; (ii) compared to the cash balance effect, the income effect is present with slightly less contribution; (iii) the exchange rate effect is observed in the analysis, while a J-curve phenomenon exists in minor cases. Novelty - This paper concludes that in the long term, income effect is found to be dominant in determining the change in trade balance. Type of Paper: Empirical. Keywords: Export; Trade Balance; VECM; J-curve; Income Effect. JEL Classification: C33, F14, O14. DOI: https://doi.org/10.35609/jber.2019.4.1(7)