Formulating and Estimating of Dynamic Nonlinear Model of Korea’s Bilateral Trade Balance

Abstract

This paper formulates and estimates the dynamic nonlinear trade model for Korea. We use monthly time series data for the period from 2000 to 2017. We employ EGARCH (1,1)-GED model which allows the positive and negative shocks to have asymmetric influences on volatility. The Johansen co-integration test is applied and finds the long run relationship among oil price, exchange rate and trade balance does exist. With respect to Indonesia as one of oil exporting countries, we find that an increase in oil prices leads to a declined trade balance as imports rise more than exports. Appreciation in IDR also leads to a declined trade balance as exports fall more than imports. For Korea as one of oil importing countries, an increase in oil prices leads to an improved trade balance as exports rise more than imports. Appreciation in KRW leads to a declined trade balance as exports fall more than imports. Oil price volatility reduces trade balance both in Indonesia and Korea. Oil price has negative effects on Indonesia’s trade balance and positive effects on Korea’s trade balance. Indonesian and Korean currency appreciation against US dollar have a negative impact on trade balance in Indonesia and Korea respectively. This information will contribute to Indonesian and Korean policy makers in making policies for their trade.