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Equilibrium exchange rates in oil-dependent countries

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Abstract

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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Bibliographic Info

Paper provided by Bank of Finland, Institute for Economies in Transition in its series BOFIT Discussion Papers with number 8/2007.

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Length: 24 pages
Date of creation: 20 Apr 2007
Date of revision:
Handle: RePEc:hhs:bofitp:2007_008

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Keywords: equilibrium exchange rate; pooled mean group estimator; resource dependency;

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References

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  1. Kaddour Hadri, 2000. "Testing for stationarity in heterogeneous panel data," Econometrics Journal, Royal Economic Society, vol. 3(2), pages 148-161.
  2. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2002. "External wealth, the trade balance, and the real exchange rate," European Economic Review, Elsevier, vol. 46(6), pages 1049-1071, June.
  3. Chen, Yu-chin & Rogoff, Kenneth, 2003. "Commodity currencies," Journal of International Economics, Elsevier, vol. 60(1), pages 133-160, May.
  4. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "THE EXTERNAL WEALTH OF NATIONS: Measures of Foreign Assets and Liabilities For Industrial and Developing Countries," Trinity Economics Papers 20014, Trinity College Dublin, Department of Economics.
  5. Juan Zalduendo, 2006. "Determinants of Venezuela'S Equilibrium Real Exchange Rate," IMF Working Papers 06/74, International Monetary Fund.
  6. Ramzi Issa & Robert Lafrance & John Murray, 2006. "The Turning Black Tide: Energy Prices and the Canadian Dollar," Working Papers 06-29, Bank of Canada.
  7. Haque, N. U. & Pesaran, M. H. & Sharma, Sunil, 1999. "Neglected Heterogeneity and Dynamics in Cross-country Savings Regressions," Cambridge Working Papers in Economics 9904, Faculty of Economics, University of Cambridge.
  8. Taline Koranchelian, 2005. "The Equilibrium Real Exchange Rate in a Commodity Exporting Country," IMF Working Papers 05/135, International Monetary Fund.
  9. Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals," IMF Working Papers 98/67, International Monetary Fund.
  10. Pesaran, H. & Smith, R. & Im, K.S., 1995. "Dynamic Linear Models for Heterogeneous Panels," Cambridge Working Papers in Economics 9503, Faculty of Economics, University of Cambridge.
  11. Paul Cashin & Luis Felipe Céspedes & Ratna Sahay, 2003. "Commodity Currencies and the Real Exchange Rate," Working Papers Central Bank of Chile 236, Central Bank of Chile.
  12. Ronald Mac Donald, 1998. "What Do We Really Know About Real Exchange Rates?," Working Papers 28, Oesterreichische Nationalbank (Austrian Central Bank).
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Cited by:
  1. Hasanov, Fakhri, 2009. "Analyzing price level in a booming economy: the case of Azerbaijan," MPRA Paper 29555, University Library of Munich, Germany.
  2. Égert, Balázs, 2009. "Dutch disease in former Soviet Union: Witch-hunting?," BOFIT Discussion Papers 4/2009, Bank of Finland, Institute for Economies in Transition.
  3. Virginie Coudert & Cécile Couharde & Valérie Mignon, 2011. "Does Euro or Dollar Pegging Impact the Real Exchange Rate? The Case of Oil and Commodity Currencies," The World Economy, Wiley Blackwell, vol. 34(9), pages 1557-1592, 09.
  4. Ibrahim Ahmed Elbadawi & Raimundo Soto, 2012. "Resource Rents, Political Institutions and Economic Growth," Documentos de Trabajo 413, Instituto de Economia. Pontificia Universidad Católica de Chile..
  5. Hasanov, Fakhri, 2010. "The impact of real oil price on real effective exchange rate: The case of Azerbaijan," MPRA Paper 33493, University Library of Munich, Germany.
  6. Balazs Egert, 2013. "Dutch Disease in the Post-Soviet Countries of Central and South-West Asia: How Contagious is it?," CESifo Working Paper Series 4186, CESifo Group Munich.

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