We assess the determinants of equilibrium real exchange rates in a sample of oil-dependent countries. Our basic data cover OPEC countries from 1975 to 2005. We also include three oil-producing Commonwealth of Independent States (CIS) countries in our robustness analysis. Utilising several estimation techniques, including pooled mean group and mean group estimators, we find that the price of oil has a clear, statistically significant effect on real exchange rates in our group of oil-producing countries. Higher oil price lead to appreciation of the real exchange rate. Elasticity of the real exchange rate with respect to the oil price is typically between 0.4 and 0.5, but may be larger depending on the specification. Real per capita GDP, on the other hand, does not appear to have a clear effect on real exchange rate. This latter result contrasts starkly with the consensus view of real exchange rates determinants, emphasising the unique position of oil-dependent countries.
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Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number
8/2007.
Length: 24 pages Date of creation: 20 Apr 2007 Date of revision: Handle: RePEc:hhs:bofitp:2007_008
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Find related papers by JEL classification: F31 - International Economics - - International Finance - - - Foreign Exchange F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics P24 - Economic Systems - - Socialist Systems and Transition Economies - - - National Income, Product, and Expenditure; Money; Inflation Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
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