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Abstract
Undoubtedly, oil prices play a crucial role in the macroeconomic performances of oil-exporting developing countries. In this regard, the exchange rate is one of the key macroeconomic indicators worthy of investigation. Existing literature shows that world oil prices play an important role in the appreciation of the exchange rates of oil-exporting developing countries. However, only a few studies have examined this issue by considering all three oil-exporting countries of the Commonwealth Independent States, namely Azerbaijan, Kazakhstan and Russia, together. In order to fill this gap and given the increasing importance of these economies in the world’s energy markets, this paper examines the role of oil prices in the movement of real effective exchange rates of the above-mentioned CIS countries. We applied the autoregressive distributed lag bounds testing method with a small sample bias correction to the data of these countries over the 2004Q1–2013Q4 period. The estimation results indicate that oil prices are certainly a main driver behind real effective exchange rate appreciation in the selected economies. Moreover, estimations show that productivity, to some extent, can also lead to the appreciation. The policy implication of this research is that an appreciation of the real exchange rate is harmful for the exports of non-oil goods and services in these countries. Since oil prices lead to the appreciation mainly through higher domestic prices, which is a result of tremendous public spending, decision-makers should reconsider the prevailing fiscal policy to make it much more counter-cyclical.
Highlights
During the last two decades, the economies of CIS countries have been subject to great transformations
Applying the autoregressive distributed lag bounds testing method, which has certain advantages in the case of small samples, to the data of the countries over the period of 2004Q1–2013Q4, we find that oil prices are amongst the main drivers of appreciation of the real exchange rate in the long-run
According to the long-run elasticities from the Autoregressive Distributed Lag Bounds Testing (ARDL) estimation results, a 1% rise in the real oil price leads to a 0.26%, 0.28% and 0.56% appreciation of Azeri, Kazakh and Russian real effective exchange rates, respectively
Summary
During the last two decades, the economies of CIS countries have been subject to great transformations. Development in the oil mining industry and oil contracts signed with international oil companies triggered the CIS oil exporters, namely, Russia, Kazakhstan and Azerbaijan, and increased their importance in the world’s energy markets (Hasanov et al 2016). Since these countries are located in the Caspian basin neighborhood and they were the former Soviet Union republics, they have many common socio-economic characteristics. Almost all of the economic activities and “behaviors” of key macroeconomic indicators are somehow related to the oil sector within these countries and in their relationships with other countries (Kose and Baimaganbetov 2015; Kaplan and Aktash 2016; Hasanov 2013 inter alia)
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