Real Exchange Rates, Oil Price Spillover Effects, and Tripolarity

Abstract

ABSTRACT The real exchange rates of the currencies of non-Eurozone countries are determined to a large extent by the behavior of the euro, because intra-EU trade accounts for a large proportion of the countries’ balances of payments. Given that their currencies and the euro are also influenced by the EUR/USD exchange rate and oil price changes, the tripolar model appears to provide an appropriate analytical framework. The empirical results of this study support the hypothesis that in the long run the euro-dollar and Polish zloty-euro exchange rates are driven by crude oil prices, and that the parities of the real risk-free interest rates determine the euro-dollar exchange rate in the short-run and the zloty-euro exchange rate in the long-run. They also show that in recent years the euro-dollar exchange rate was long influenced by the ECB’s asset purchase program. The impulse response analysis clearly indicates that in addition to shocks from credit default risk premiums and interest rates innovations oil price shocks too are a significant and pervasive source of the nonstationary dynamics of the exchange rates.