Abstract
This study explores the dynamic effects of different oil shocks on real exchange rates in net oil importers and exporters. Specifically, the connectedness measures are combined with the structural vector autoregressive model. The findings show that oil supply shocks have a larger depreciating influence on exchange rates in oil exporters than in importers. All countries are generally more sensitive to oil-specific demand shocks, and this sensitivity can lead to a significant appreciation in real exchange rates, except in Japan and the United Kingdom. Further, the spillover effect between oil shocks and exchange rates has strengthened after the global financial crisis of 2007–08. Our findings provide useful implications for the policy-makers and market risk managers to effectively avoid exchange rate risk induced by oil shocks.
Highlights
Oil’s importance as an energy resource and influence in the global economic system has steadily increased.1 Especially, the increasing oil trade has placed pressure on the current payment balance and led to exchange rate fluctuations (Bal and Rath 2015)
We find that impacts of oil shocks on real exchange rates have gradually increased over time, after the global financial crisis (GFC) of 2008
Norway and Japan’s real exchange rates are all greatly influenced by oil supply shocks, implying that increase in oil supply has a depreciating effect on these currencies
Summary
Oil’s importance as an energy resource and influence in the global economic system has steadily increased. Especially, the increasing oil trade has placed pressure on the current payment balance and led to exchange rate fluctuations (Bal and Rath 2015). The increasing oil trade has placed pressure on the current payment balance and led to exchange rate fluctuations (Bal and Rath 2015). Because oil price is a widely verified source of shock for exchange rates (Ji et al 2015; Basher et al 2016), investigating the underlying forces and transmission mechanisms of oil shocks to exchange provides useful information to market investors and holds important implications for policy-makers and central banks. Investors can incorporate any evidence of impacts of oil shocks on exchange rates in their investment and asset allocations decisions. As for policy-makers and central banks, who are concerned about the stability of exchange rates, they can improve their understanding of the vulnerability of exchange rates to oil price shocks so more appropriate policies and regulations can be formulated. Within the related literature regarding the impact of oil prices on exchange rates, researchers apply various methodologies, such as cointegration and Granger causality (Huang and Tseng 2010), Markov-switching analysis (Beckmann and Czudaj 2013), vector autoregressive (VAR) models (Pershin et al 2016a, b), GARCH jump models (Jawadi et al 2016), multivariate GARCH-type models (Jain and Biswal 2016), wavelet models (Yang et al 2017), copula models (Beckmann et al 2016; Mensi et al 2017), and
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