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Time-varying relationship between oil price and exchange rate

Author

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  • Castro Rozo, César
  • Jiménez-Rodríguez, Rebeca

Abstract

This paper contributes to better understand the dynamic interaction between U.S. effective exchange rate (EER) and oil price by considering a Time-Varying Parameter VAR model with the use of monthly data from 1974 to 2017. Our findings show a depreciation after an oil price shock in the short-run for any period of time, although the pattern of long-run responses of U.S. EER is diverse across different period of time, with an appreciation being observed before the mid-2000s and a depreciation afterwards. This diversity of response should lead policy makers to react differently in order to counteract such shocks. Furthermore, the reaction of oil price to an appreciation of U.S. EER is negative, with the response being similar in the short-run but different in the long-run for each period of time. Thus, the different responses may generate different adverse effects on investment and the knowledge of such effects may help financial investors to diversify their investments in order to optimize the risk-return profile of their portfolios.

Suggested Citation

  • Castro Rozo, César & Jiménez-Rodríguez, Rebeca, 2018. "Time-varying relationship between oil price and exchange rate," MPRA Paper 87879, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:87879
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    File URL: https://mpra.ub.uni-muenchen.de/87879/1/MPRA_paper_87879.pdf
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    References listed on IDEAS

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    Cited by:

    1. Huang, Shupei & An, Haizhong & Lucey, Brian, 2020. "How do dynamic responses of exchange rates to oil price shocks co-move? From a time-varying perspective," Energy Economics, Elsevier, vol. 86(C).

    More about this item

    Keywords

    Oil price; Exchange rate; TVP-VAR model;

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • Q31 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Demand and Supply; Prices
    • Q37 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Issues in International Trade

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