Oil Prices and the Trade Balance of Sub-Saharan African Countries: The Roles of Oil Price Volatility, Real Exchange Rates, and Financial Integration.

This thesis empirically examines the effects of oil prices on the trade balances of oil importing and exporting Sub-Saharan African countries. These countries depend heavily on international trade for foreign exchange and economic growth, and fluctuations in oil prices have direct implications for their terms of trade. This thesis contributes to the oil price-trade balance literature by focusing on three aspects of this relationship that are unexplored. First, this thesis introduces the issue of nonlinear oil price effects to the trade balance literature. Using a Threshold Vector Autoregressive Model, it estimates asymmetric and threshold effects of oil prices on the trade balance, focusing on oil price volatility as the source of nonlinearity. Nonlinearities are shown to be stronger in the effects of oil price volatility shocks than oil price level shocks: volatility shocks have larger effects on the trade balance when they occur in an already volatile environment, and decreases in oil price volatility have larger effects than increases. Second, this thesis pioneers the empirical investigation of the role of real exchange rates in determining the effects of oil prices on the trade balance. Using a Cross Section Dependence robust panel data method, this thesis shows that real exchange rate depreciations reduce the effects of oil prices on the trade balances of SSA countries, while real appreciations reinforce these effects. Third, this thesis is the first study to empirically investigate how higher international financial risk sharing affects the response of the trade balance to oil prices. To do this, it employs a Panel Smooth Transition Regression model. The results show that oil importing SSA countries that are well integrated in global financial markets, with higher access to foreign funds, fare better when the oil price is high: they are able to avoid large fluctuations in their nonoil trade balances by smoothing nonoil consumption.