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Dynamic linkage between oil prices and exchange rates: new global evidence

Author

Listed:
  • Bwo-Nung Huang

    (National Chung Cheng University)

  • Chi-Chuan Lee

    (Southwestern University of Finance and Economics)

  • Yu-Fang Chang

    (Takming University of Science and Technology)

  • Chien-Chiang Lee

    (Nanchang University
    Nanchang University)

Abstract

This paper examines the dynamic linkage between crude oil prices and exchange rates from a global perspective. Unlike the conventional cointegration specification used in earlier works, we evaluate long- and short-run relations based on the pooled mean group approach. Taking monthly data of real oil prices and real exchange rates from the period January 1997 to July 2015, we classify 81 countries by their net oil import status (i.e., oil-importing and oil-exporting) and exchange rate arrangement systems (i.e., free-floating and managed floating), presenting results that the long-run relationship between oil prices and exchange rates depends on country-specific circumstances. For countries adopting free-floating systems, oil importers reveal a significantly negative bidirectional correlation, while oil exporters show no correlation between oil prices and exchange rates. As for managed floating systems, only exchange rates have predictive content for oil prices no matter in the cases of oil importers or exporters. Knowledge of these relationships can guide government policy development to prevent sudden and substantial shocks from crude oil price and exchange rate movements.

Suggested Citation

  • Bwo-Nung Huang & Chi-Chuan Lee & Yu-Fang Chang & Chien-Chiang Lee, 2021. "Dynamic linkage between oil prices and exchange rates: new global evidence," Empirical Economics, Springer, vol. 61(2), pages 719-742, August.
    • Handle: RePEc:spr:empeco:v:61:y:2021:i:2:d:10.1007_s00181-020-01874-8
    DOI: 10.1007/s00181-020-01874-8
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    3. Lee, Chi-Chuan & Tang, Huayun & Li, Ding, 2022. "The roles of oil shocks and geopolitical uncertainties on China’s green bond returns," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 494-505.
    4. Min Liu & Wei‐Chong Choo & Chi‐Chuan Lee & Chien‐Chiang Lee, 2023. "Trading volume and realized volatility forecasting: Evidence from the China stock market," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 42(1), pages 76-100, January.
    5. Sokhanvar, Amin & Çiftçioğlu, Serhan & Lee, Chien-Chiang, 2023. "The effect of energy price shocks on commodity currencies during the war in Ukraine," Resources Policy, Elsevier, vol. 82(C).
    6. Naqvi, Bushra & Rizvi, Syed Kumail Abbas & Hasnaoui, Amir & Shao, Xuefeng, 2022. "Going beyond sustainability: The diversification benefits of green energy financial products," Energy Economics, Elsevier, vol. 111(C).
    7. Jalal, Rubia & Gopinathan, R., 2022. "Time-varying and asymmetric impact of exchange rate on oil prices in India: Evidence from a multiple threshold nonlinear ARDL model," Finance Research Letters, Elsevier, vol. 50(C).
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    Keywords

    Crude oil price; Exchange rate; Exchange rate systems; Pooled mean group;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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