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Assessing the turbulence: Wavelet coherence and causality analysis of energy price volatility and exchange rate instability

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  • Razi, Ummara
  • Cheong, Calvin W.H.
  • Shams, Syed
  • Sarker, Tapan
  • Sharif, Arshian
  • Afshan, Sahar

Abstract

This study examines the dynamic relationship between energy price volatility and exchange rates in the ASEAN region from 2000 to 2023. Given ASEAN's energy dependency and diverse economic structures, understanding these interactions is essential for policy resilience against global energy market fluctuations. The study employs wavelet coherence analysis to explore the time-frequency dynamics between energy prices and currency valuation. Findings suggest that energy price volatility significantly influences global economic stability, directly impacting the exchange rates of energy-exporting nations like Indonesia and Malaysia, where rising energy prices strengthen currency values. Similarly, Singapore's exchange rate has appreciated due to its status as a financial hub. In contrast, Brunei, the Philippines, and Vietnam, as energy importers, exhibit negative coherence, reflecting vulnerability to economic shocks and commodity price fluctuations. The study also considers inflation trends using the Consumer Price Index as a moderator, finding that inflation amplifies exchange rate sensitivity to energy price volatility. Additionally, the wavelet Granger causality test enhances result robustness. These findings emphasize the need for proactive policies to mitigate the impact of energy price fluctuations on currency stability and inflation across ASEAN economies.

Suggested Citation

  • Razi, Ummara & Cheong, Calvin W.H. & Shams, Syed & Sarker, Tapan & Sharif, Arshian & Afshan, Sahar, 2025. "Assessing the turbulence: Wavelet coherence and causality analysis of energy price volatility and exchange rate instability," Energy, Elsevier, vol. 331(C).
    • Handle: RePEc:eee:energy:v:331:y:2025:i:c:s0360544225025903
    DOI: 10.1016/j.energy.2025.136948
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    • 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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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