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Do exchange rates respond asymmetrically to shocks in the crude oil market?

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  • Atems, Bebonchu
  • Kapper, Devin
  • Lam, Eddery

Abstract

The paper argues that exchange rates respond asymmetrically to different shocks to the crude oil market. We apply Kilian's (2009) methodology to disentangle shocks to the crude oil market into distinct demand and supply shocks, and examine the response of the U.S. real and nominal trade-weighted U.S. dollar exchange rate indexes, as well as six other bilateral exchange rates to these shocks. Our analysis indicates that oil supply shocks have no significant effects on exchange rates, while global aggregate demand and oil-specific demand shocks lead to depreciations. We further show that exchange rates respond asymmetrically to shocks in the crude market depending on whether the shocks are large versus small, or positive versus negative.

Suggested Citation

  • Atems, Bebonchu & Kapper, Devin & Lam, Eddery, 2015. "Do exchange rates respond asymmetrically to shocks in the crude oil market?," Energy Economics, Elsevier, vol. 49(C), pages 227-238.
  • Handle: RePEc:eee:eneeco:v:49:y:2015:i:c:p:227-238
    DOI: 10.1016/j.eneco.2015.01.027
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    References listed on IDEAS

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    More about this item

    Keywords

    Oil price shocks; Exchange rates; Vector autoregressive (VAR) models;

    JEL classification:

    • 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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