The Impact of Energy Prices and the Real Exchange Rate on the Trade Balance: The Case of Serbia

Abstract

The Republic of Serbia consistently records a trade balance deficit (TBD), as the value of imports exceeds the value of exports, with energy import dependency being a significant contributing factor. The aim of this paper is to examine the impact of changes in energy prices, measured by the Energy Price Index (EPI), and the real effective exchange rate (REER) on the TBD in the context of the competitiveness of the national economy. Empirical findings are based on estimated Vector Autoregression (VAR) model comprising the variables of TBD, EPI and REER in order to reveal their dynamic interdependence in the period 2009M1-2023M12 when National Bank of Serbia operates under the monetary framework of inflation targeting. It is expected that REER appreciation and EPI growth will worsen the TBD, which is supported by the results of the estimated VAR model and derived impulse response functions (IRFs). Republic of Serbia, as a small and open economy in the process of real convergence with developed European economies, is highly vulnerable to external shocks and turbulences at international market. Reducing the chronic TBD and energy dependence requires strategic investments in renewable energy sources and energy efficiency on one hand, and improving export performance via structural reforms on the other.