Revisiting the Trade Balance Nexus: The Role of Exchange Rates and Oil Price in Developing Countries

Abstract

This study investigates the impact of real effective exchange rate, oil price, economic growth, and capital account balance on trade balance in developing economies. Using panel data for ten developing countries over the period 1970–2023, the study applies dynamic panel ARDL techniques to capture both short-run and long-run dynamics. The findings indicate that an appreciation in real effective exchange rate negatively affects trade balance by reducing export competitiveness, while economic growth and capital account balance positively contribute to improving trade balance. Oil price fluctuations have asymmetric effects depending on countries’ net oil positions. The error correction term confirms convergence toward long-run equilibrium, highlighting the importance of coordinated macroeconomic and external sector policies. The study provides updated empirical evidence and offers policy insights for enhancing trade balance sustainability, optimizing capital inflows, and managing oil price exposure in developing economies.

Jell Codes: F31, O47, Q41, F31, F1