Oil prices and effective dollar exchange rates
This study takes into account two previously neglected issues in its analysis of the relationship between oil prices and effective dollar exchange rates, namely, nonlinear adjustment dynamics and a distinction between nominal and real linkages. Beginning with a careful investigation of different subsets, and using a Markov-switching vector error correction model, we are able to discriminate long-run and time-varying short-run dynamics. Our findings show not only that the results depend on the choice of the exchange rate measure, but also that the time-varying causality patterns mainly runs from nominal exchange rates to nominal oil prices.
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