Abstract
Due to technological innovation and energy consumption growth in recent years, US and China become increasingly important players in the world crude oil market and are growingly exposed to not only supply and demand shocks but also foreign exchange risks. To better understand the nexus of crude oil prices and exchange rate, we construct a nonlinear vector autoregressive model to investigate the nonlinear and asymmetric relationships among the US and China’s crude oil prices and the RMB-dollar exchange rate. This study finds that the interactions between US and China’s crude oil prices and the effect of exchange rate on oil prices are time-varying and, more importantly, dependent on oil price regimes. The reform of China’s exchange rate system has significantly impacted the dynamic relationship by enhancing China’s influence on the oil pricing in the world market.
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