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Oil prices and trade balance: a frequency domain analysis for India

  • Mohamed Arouri
  • Aviral Kumar Tiwari
  • Frédéric Teulon

We study lead-lag relationships between oil price and trade balance for India by using monthly data covering the period from January 1980 to December 2011 and post current account convertibility era (from August 1994 to December 2011). We adopt the approach proposed by Breitung and Candelon (2006) along-with the traditional VAR based conditional Grangercausality. Results of VAR based conditional Granger-causality provide evidence of bidirectional causal relationship in both study periods. Impulse response analysis shows positive response of oil price to one innovation shock in trade balance whereas trade balance shows negative response to one innovation shock in oil price. Though, frequency domain analysis also provides evidence of bidirectional causal relationship but that hold for dissimilar frequencies of short and medium run in the full sample. Moreover, more strength and high degree of cyclicality are found when causality is running from oil price to trade balance. Interestingly, results of the post current account convertibility provide evidence of frequency domain causality running from oil price to trade balance at short, medium and long run not the otherwise. Hence, our study shows that the oil price has become a leading indicator for Indian trade balance in the short, medium and long horizons.

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Paper provided by Department of Research, Ipag Business School in its series Working Papers with number 2014-116.

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Length: 23 pages
Date of creation: 25 Feb 2014
Date of revision:
Handle: RePEc:ipg:wpaper:2014-116
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  1. Eric Zivot & Donald W.K. Andrews, 1990. "Further Evidence on the Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Cowles Foundation Discussion Papers 944, Cowles Foundation for Research in Economics, Yale University.
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  17. Tiwari, Aviral Kumar, 2013. "Oil prices and the macroeconomy reconsideration for Germany: Using continuous wavelet," Economic Modelling, Elsevier, vol. 30(C), pages 636-642.
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