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Is the oil currency – oil price nexus affected by dollar swings?

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  • Gabriel Gomes

Abstract

This paper investigates to which extent dollar real exchange rate movements affect the relationship between oil prices and oil currencies. Estimating a panel cointegrating model between the real exchange rate and its drivers for a sample of 11 OPEC countries and 8 major oil-exporting economies over the 1980-2013 period, we find evidence to support the existence of oil currencies. To analyze how dollar movements may affect the oil price – oil currency nexus, we then estimate a panel smooth transition regression model. Results show that beyond a certain threshold for the dollar depreciation, the sign of the relationship between oil prices and oil countries’ exchange rate switches from positive to negative. In fact, when the dollar depreciation is higher than 2.45%, an increase in oil price has a negative impact on oil exporters’ exchange rate. We also re-explore the causality between the USD real exchange rate and the oil price, showing that the causality between the two variables has changed over the period under study. Finally, we investigate how the Fed monetary policy may impact the oil currency – oil price relationship, and find evidence to support that the US policy rate is a key to understand oil currencies movements.

Suggested Citation

  • Gabriel Gomes, 2014. "Is the oil currency – oil price nexus affected by dollar swings?," EconomiX Working Papers 2014-53, University of Paris Nanterre, EconomiX.
    • Handle: RePEc:drm:wpaper:2014-53
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    File URL: http://economix.fr/pdf/dt/2014/WP_EcoX_2014-53.pdf
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    More about this item

    Keywords

    Oil price; Oil currencies; Non-linearities;
    All these keywords.

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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