Does Real Exchange Rate Respond Asymmetrically to Changes in Real Oil Price?

Overdependence on oil export has made the Russian economy more vulnerable to fluctuations of oil price in the world market. Moreover, existing empirical evidence on the relationship between real exchange rate and real oil price in the country has yet to account for any possible asymmetric adjustment of the real exchange rate that result from changes in the real oil price. In view of this, the current study examines the relationship between the real exchange rate and the real oil price using monthly dataset from Russia for the period of January 1995 to April 2013 and symmetric cointegration tests proposed by Engle and Granger and Johansen. In addition, the study used Threshold Autoregressive (TAR) and Momentum Threshold Autoregressive (MTAR) estimation techniques to test for asymmetric cointegration. The study further conducted an asymmetric error correction modelling using the threshold value from MTAR-consistent to estimate the dynamics of the real exchange rate caused by changes in real oil price. Overall, the results of the study reveal the presence of a long-run relationship between the real exchange rate and the real oil price using all the estimation techniques. Specifically, the result of MTAR-Consistent produces evidence of a cointegrating relationship between the real exchange rate and the real oil price with asymmetric adjustment of the former to the long-run equilibrium values. The speed of adjustment of the real exchange rate is more rapid when the deviation from the equilibrium values is negative than when the deviation is positive. According to the estimations, 22 percent of the negative departures from the equilibrium values are corrected during the subsequent month. But only 4.8 percent of the positive deviations from the equilibrium values are corrected in the following month. From the policy viewpoint, the results suggest that real exchange rate depreciations brought about by falling oil price are defended and rapidly reversed by the Russian monetary authorities than real exchange rate appreciation caused by rising oil price. In other words, Russia intervened more during oil price slumps to defend her currency from depreciations, but intervened less during oil price booms to revert or postpone any appreciation of her currency.