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Empirical Analysis of Crude Oil Price Effects on Exchange Rate Volatility

Author

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  • Kemati, Reinhold

    () (Senior Economist, Research Department, Bank of Namibia, Windhoek, Namibia)

Abstract

This study examined the effects of crude oil price on nominal exchange rate volatility for oil and non-oil exporting countries. Immediately after the global financial crisis, the swings in the movement of crude oil price revealed how vulnerable the currencies of oil exporting countries and other commodity exporting countries. Using the Structural VAR method and the sample data from 2011 to 2016, the study estimated the effects of crude oil price on exchange rate stability and its impulse responses. Empirical results show that exchange rates for oil exporting countries are highly vulnerable to crude oil price shocks. As crude oil price declines, exchange rate volatility increases, similarly large crude oil price increases are associated with low exchange rate volatility. Currencies such as Angolan Kwanza, Russian Ruble, and Mexican Peso are very sensitive to crude oil price shocks. SVAR results show that oil price shocks significantly reduce exchange rate volatility of oil exporting countries. Meanwhile, the exchange rate volatility for non-oil exporting countries was driven by other factors than the price of crude oil.

Suggested Citation

  • Kemati, Reinhold, 2018. "Empirical Analysis of Crude Oil Price Effects on Exchange Rate Volatility," Empirical Economic Review, University of Management and Technology, Lahore, vol. 1(2), pages 17-48.
  • Handle: RePEc:ris:empecr:0007
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    File URL: https://ojs.umt.edu.pk/index.php/eer/article/view/139/52
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    Keywords

    Commodities; External Supply Shocks; Foreign Exchange Rates; Open Economy; Macroeconomics; Prices;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F37 - International Economics - - International Finance - - - International Finance Forecasting and Simulation: Models and Applications
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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