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Empirical Economics

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25-04-2020

Dynamic linkage between oil prices and exchange rates: new global evidence

Authors: Bwo-Nung Huang, Chi-Chuan Lee, Yu-Fang Chang, Chien-Chiang Lee

Published in: Empirical Economics | Issue 2/2021

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Abstract

This paper examines the dynamic linkage between crude oil prices and exchange rates from a global perspective. Unlike the conventional cointegration specification used in earlier works, we evaluate long- and short-run relations based on the pooled mean group approach. Taking monthly data of real oil prices and real exchange rates from the period January 1997 to July 2015, we classify 81 countries by their net oil import status (i.e., oil-importing and oil-exporting) and exchange rate arrangement systems (i.e., free-floating and managed floating), presenting results that the long-run relationship between oil prices and exchange rates depends on country-specific circumstances. For countries adopting free-floating systems, oil importers reveal a significantly negative bidirectional correlation, while oil exporters show no correlation between oil prices and exchange rates. As for managed floating systems, only exchange rates have predictive content for oil prices no matter in the cases of oil importers or exporters. Knowledge of these relationships can guide government policy development to prevent sudden and substantial shocks from crude oil price and exchange rate movements.

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In the case of the long-run coefficients being large but insignificant, the test statistics are negative. This result is the same as those reported in Asafu-Adjaye et al. (2016).

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Title: Dynamic linkage between oil prices and exchange rates: new global evidence
Authors: Bwo-Nung Huang
Chi-Chuan Lee
Yu-Fang Chang
Chien-Chiang Lee
Publication date: 25-04-2020
Publisher: Springer Berlin Heidelberg
Published in: Empirical Economics / Issue 2/2021
Print ISSN: 0377-7332
Electronic ISSN: 1435-8921
DOI: https://doi.org/10.1007/s00181-020-01874-8

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