Time-varying impact of oil shocks on trade balances: Evidence using the TVP-VAR model

Abstract

This paper investigates the effects of oil supply and demand shocks on the current account balances of China and Russia for the period between the first quarter of 1993 and the third quarter of 2018 using a time-varying parameter vector autoregression (TVP-VAR) model with stochastic volatility. To facilitate comprehension of the results and to anchor them in well-known events, this analysis focuses on two countries with different oil trade characteristics—Russia as an oil exporter and China as an oil importer. We find that identifying their sources plays an important role in understanding the impact of oil price shocks on trade balances. The results indicate that oil demand shocks have a much larger effect on trade balances and are more attributable to oil price shocks than oil supply shocks. Due to their different positions in the global oil market—one an oil exporter and the other, an oil importer—China’s and Russia’s individual responses differ substantially. In line with findings regarding impulse responses, the time-varying forecast error decompositions demonstrate that both oil supply and demand shocks have their greatest influence during and immediately after periods of crisis.