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Dynamics between Oil Prices and UAE Effective Exchange Rates: An Empirical Examination

Author

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  • Hamid Baghestani

    (Department of Economics, American University of Sharjah, Sharjah, UAE)

  • Bassam M. AbuAl-Foul

    (Department of Economics, American University of Sharjah, Sharjah, UAE)

Abstract

Utilizing monthly data for 1994-2017, we investigate the dynamic relationship between real oil prices and the real broad effective exchange rate of the United Arab Emirates (UAE). Our findings indicate that this relationship experienced a structural change around 2008. That is, for both 1994-2008 and 2008-2017, the series each has a unit root, but they possess a long-run equilibrium relationship only for the latter period with the real effective exchange rate asymmetrically responding to eliminate disequilibrium; i.e., the response is relatively small when disequilibrium is negative and relatively large when disequilibrium is positive. Further evidence indicates that oil prices have directional predictive power for the real exchange rate for the period after but not before the 2008 financial crisis. Accurate directional predictions for 2008-2017 imply symmetric loss, meaning that they are of value to a user who assigns the same loss (cost) to upward and downward moves in the real effective exchange rate. These findings are important to both UAE policymakers in promoting trade and attracting foreign investment and to foreign entities which consider the UAE an attractive environment for investing in various sectors.

Suggested Citation

  • Hamid Baghestani & Bassam M. AbuAl-Foul, 2019. "Dynamics between Oil Prices and UAE Effective Exchange Rates: An Empirical Examination," Review of Economics & Finance, Better Advances Press, Canada, vol. 16, pages 89-103, May.
    • Handle: RePEc:bap:journl:190207
    Note: The authors would like to thank two anonymous referees for helpful comments and suggestions.
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    More about this item

    Keywords

    Foreign exchange; Oil prices; Cointegration; Asymmetric adjustment; Directional accuracy;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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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