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When Does the Oil Price Affect the Norwegian Exchange Rate?

Author

Listed:
  • Qaisar Farooq Akram
  • Research Department
  • Norges Bank

Abstract

Major changes in the Norwegian exchange rate have often coincided with large fluctuations in the price of crude oil. Previous empirical studies have however suggested a weak and ambiguous relation between the oil price and the exchange rate. In contrast to these studies, this paper explores the possibility of a non-linear relation between oil prices and the exchange rate. An examination of daily observations reveals a negative relation between the oil price and the nominal value of the currency. The strength of this relation depends on whether the oil price is below, inside or above the range of 14-20 US dollars a barrel. Moreover, it depends on whether the oil price is displaying a falling or rising trend. The relation is relatively strong when oil prices are below 14 dollars and are falling. These non-linear effects are tested and quantified within equilibrium correcting models of the exchange rate, derived on monthly and quarterly data to control for the influence of other macroeconomic variables. The models with non-linear oil price effects outperform similar models with linear oil price effects. The latter models grossly underestimate the exchange rate response to oil price changes in a state of low oil prices. The paper undertakes an extensive evaluation of the derived models to demonstrate the robustness of the results.

Suggested Citation

  • Qaisar Farooq Akram & Research Department & Norges Bank, 2000. "When Does the Oil Price Affect the Norwegian Exchange Rate?," Economics Series Working Papers 31, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:31
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    Cited by:

    1. Chen, Hongtao & Liu, Li & Wang, Yudong & Zhu, Yingming, 2016. "Oil price shocks and U.S. dollar exchange rates," Energy, Elsevier, vol. 112(C), pages 1036-1048.
    2. Luc Bauwens & Dagfinn Rime & Genaro Sucarrat, 2008. "Exchange rate volatility and the mixture of distribution hypothesis," Studies in Empirical Economics, in: Luc Bauwens & Winfried Pohlmeier & David Veredas (ed.), High Frequency Financial Econometrics, pages 7-29, Springer.
    3. Bowe, Michael & Saltvedt, Thina M., 2004. "Currency invoicing practices, exchange rate volatility and pricing-to-market: evidence from product level data," International Business Review, Elsevier, vol. 13(3), pages 281-308, June.
    4. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    5. Geir E. Alstad, 2010. "The long-run exchange rate for NOK: a BEER approach," Working Paper 2010/19, Norges Bank.
    6. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2003. "Econometric inflation targeting," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 430-461, December.

    More about this item

    Keywords

    currency crises; exchange rate; oil price; non-linear econometric models;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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