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Is there a homogeneous causality pattern between oil prices and currencies of oil importers and exporters?

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  • Beckmann, Joscha
  • Czudaj, Robert

Abstract

Although the link between oil prices and dollar exchange rates has been frequently analyzed, a clear distinction between prices and nominal exchange rate dynamics and a clarification of the issue of causality has not been provided. In addition, previous studies have mostly neglected nonlinearities which for example may stem from exogenous oil price shocks. Using monthly data for various oil-exporting and oil-importing countries, this study contributes to the clarification of those issues. We discriminate between long-run and time-varying short-run dynamics, using a Markov-switching vector error correction model. In terms of causality, the results differ between the economies under observation but suggest that the most important causality runs from exchange rates to oil prices, with a depreciation of the dollar triggering an increase in oil prices. On the other hand, changes in nominal oil prices are responsible for ambiguous real exchange rate effects mostly through the price differential and partly also through a direct influence on the nominal exchange rate. Overall, the fact that the adjustment pattern frequently differs between regimes underlines the fact that the relationships are subject to changes over time, suggesting that nonlinearities are an important issue when analyzing oil prices and exchange rates.

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  • Beckmann, Joscha & Czudaj, Robert, 2013. "Is there a homogeneous causality pattern between oil prices and currencies of oil importers and exporters?," Energy Economics, Elsevier, vol. 40(C), pages 665-678.
  • Handle: RePEc:eee:eneeco:v:40:y:2013:i:c:p:665-678 DOI: 10.1016/j.eneco.2013.08.007
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    Keywords

    Bayesian econometrics; Cointegration; Exchange rates; Markov-switching model; Oil prices; Oil-importing and oil-exporting countries;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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