Modelling of the Dynamics of Relationship between World Crude Oil Prices and Indonesia’s Trade Balance: An LVAR Analysis

Abstract

This paper aims to examine the long-term dynamics of relationship between world crude oil prices and Indonesia’s trade balance, and establish a model of the relationship dynamics. The data used were the monthly data covering the period from January 2004 to October 2014, and were analyzed by using the LVAR (p, q) causal model proposed by Agung (Time series data analysis using eview. Singapore : John Wiley & Son, 2009). Results of data analysis demonstrated a significant long-term dynamic relationship between world crude oil prices and Indonesia’s trade balance. The relationship between those two variables was negative, i.e., if the prices of world crude oil increase, the trade balance decreases.

Keywords : Crude oil price, trade balance, LVAR analysis