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Economic Change and Restructuring

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22-07-2023

Do oil prices predict the exchange rate in Algeria? Time, frequency, and time‐varying Granger causality analysis

Authors: Hicham Ayad, Ousama Ben-Salha, Miloud Ouafi

Published in: Economic Change and Restructuring | Issue 5/2023

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Abstract

This study investigates whether international crude oil prices predicted the exchange rate in Algeria between January 1988 and June 2022. This paper does so by employing a variety of causality tests. More specifically, the causal linkages are checked using various time domain causality tests, the frequency domain causality test proposed by Breitung-Candelon (J Econom 132(2):363–378, 2006) and the time-varying causality test recently developed by Shi et al. (2018, 2020). The different causality tests suggest that fluctuations in Brent crude oil prices do not cause the real effective exchange rate. These findings are robust to introducing alternative exchange rates and crude oil price proxies. The analysis is further extended by considering the asymmetric and volatile behaviors of crude oil prices. The time-varying causality test indicates that the real effective exchange rate exhibits a significant response solely to decreases in oil prices. Finally, oil price volatility obtained from the EGARCH (2,2) model has predictive power on the exchange rate following each decline in crude oil prices. The discussion and policy recommendations are subsequently provided.

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Results of the different ARCH-type models are available from the corresponding author on reasonable request.

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Title: Do oil prices predict the exchange rate in Algeria? Time, frequency, and time‐varying Granger causality analysis
Authors: Hicham Ayad
Ousama Ben-Salha
Miloud Ouafi
Publication date: 22-07-2023
Publisher: Springer US
Published in: Economic Change and Restructuring / Issue 5/2023
Print ISSN: 1573-9414
Electronic ISSN: 1574-0277
DOI: https://doi.org/10.1007/s10644-023-09545-1

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