Uncovering the dynamic relationship between oil prices and external trade in OECD countries

Abstract

This study investigates the impact of oil price fluctuations on trade, including the exports and imports of goods and services, fuel exports and fuel imports. For this purpose, we employed a Pooled Mean Group estimator on the autoregressive distributed lag (PMG–ARDL) model. This approach helps investigate the short-run and long-run effects of oil price changes on trade indicators considering the difference of convergence path across countries while handling problems of endogeneity. This study examines a strongly balanced panel dataset of 34 OECD countries over the 26 years from 1995 to 2020. Overall, the findings indicate that rising oil prices have a positive and significant impact on all trade indicators. The results are consistent with the immediate and persistent influence of oil price fluctuations on trade. Nevertheless, the effects of other explanatory variables on trade vary across different trade indicators and in the short and long runs. From a policy perspective, it is vital to comprehend the appropriate policy responses to oil price changes to achieve the expected trade outcomes.