The price of crude oil and foreign exchange rates are both key macroeconomic variables, but their interaction has not been fully investigated. Most works in the literature agree that shocks in the oil price bear a significant portion of the responsibility of exchange rate fluctuations. However, the question of whether exchange rate dynamics have an impact on oil price movements has received no conclusive answer. This paper employs a two-step regression approach to show that exchange rates can affect the crude oil price disturbance, and therefore equilibrium oil prices. By use of an auxiliary regression, the dynamics of oil price disturbance are separated from the observed prices and tested against the effective exchange rate of the U.S. dollar. In an empirical dataset covering twenty years, we detect a significant two-way causal relationship between such dynamics and the exchange rate.
|Number of pages||12|
|Journal||International Research Journal of Finance and Economics|
|State||Published - 1 Dec 2010|
- Crude oil
- Exchange rate
- Price disturbance
- Vector error correction model