Time-Varying Relationship between Crude Oil Price and Exchange Rate in the Context of Structural Breaks

Yue Liu,Jiaying Peng,Pierre Failler,Yuhang Zheng

doi:10.3390/en13092395

Abstract

This paper examines the dynamic relationship between crude oil prices and the U.S. exchange rate within the structural break detection context. Based on monthly data from January 1996 to April 2019, this paper identifies structural breaks in movements of oil price and examines the dynamic relationship between crude oil prices and the U.S. exchange rate movement by introducing the economic policy uncertainty and using the TVP-VAR (Time-Varying Parameter-Vector Auto Regression ) model. Empirical results indicate that shocks to crude oil prices have immediate and short-term impacts on movements in the exchange rate which are emphasized during the confidence intervals of structural breaks. Oil price shocks and economic policy uncertainty are interrelated and influence movements in the U.S. exchange rate. Since the U.S. dollar is the main currency of the international oil market and the U.S. has become a major exporter of crude oil, the transmission of price shocks to the U.S. exchange rate becomes complicated. In most cases, the relationship between oil prices and the U.S. exchange rate movements is negative.

Highlights

The fluctuation of oil prices has an important influence on a country’s exchange rate
It is worth noting that only three variables are selected in this paper, i.e., crude oil price, exchange rate and economic policy uncertainty, which is mainly due to the following two reasons: on the one hand, the research objective of this paper is to study the dynamic correlation between crude oil price and exchange rate, rather than the relationship between the explanation and the explained
This paper studies the dynamic relationship between crude oil price and exchange rate and draws the following conclusions

Summary

Introduction

The fluctuation of oil prices has an important influence on a country’s exchange rate. In a market-oriented and open economy, the fluctuation of crude oil prices will cause the change of an economy’s exchange rate. Relevant literature proves that the fluctuation of crude oil prices will cause the exchange rate of USD to move in the same direction of the oil-importing countries, such as. For oil-importing countries, oil price fluctuations constitute the main source of exogenous shocks to a country’s economy and have an important impact on the exchange rate of importing countries [6,7,8]. At the same time, when the crude oil price volatility is incorporated into the corresponding currency or asset selection model, the oil price volatility has a significant impact on the exchange rate. Coudert and Mignon [11] added oil price volatility into the currency model and found that the increase of oil price would lead to the depreciation of the importing country’s

Objectives

Methods

Conclusion