Abstract
This study aims to examine the asymmetric effect of crude oil price and volatility on exchange rate. The price of WTI crude oil is a proxy for crude oil, while IDR/USD exchange rate is a proxy for exchange rate. The time series of both WTI crude oil price and IDR/USD exchange rate span the period of January 2006 to December 2017. To test the asymmetric effect, the NARDL-GARCH-M model is used. The results of the analysis show that in the short-term there is an asymmetric effect of crude oil price and volatility on the IDR/USD exchange rate while in the long-term such effect does not exist.Keywords: Crude oil prices, exchange rates, volatility, NARDL model, GARCH-M modelJEL Classifications: C120, C320, E310, G150DOI: https://doi.org/10.32479/ijeep.8362
Highlights
Crude oil is one commodity that plays an important role in the world’s economy, and all countries require this particular commodity to build their economy
The effect of crude oil prices on currency exchange rate can be explained through channels, as follows: (1) an increase in crude oil prices can lead to the transfer of wealth from crude oil importing countries to crude oil exporting countries which causes the wealth of the exporting countries to rise
The first step is to carry out a test for stationarity on the three time series: the partial sum of positive change in crude oil price (OIP), the partial sum of negative change in crude oil price (OIN), and the exchange rate of IDR/USD (EXC)
Summary
Crude oil is one commodity that plays an important role in the world’s economy, and all countries require this particular commodity to build their economy.
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