Chapter 6 Oil Prices and Exchange Rates: Some New Evidence Using Linear and Nonlinear Models

Abstract

Purpose – The purpose of this chapter is to investigate the linear and nonlinear short- and long-run relationships between the real price of oil and the US real effective exchange rate.

Methodology/approach – We use recent linear and nonlinear econometric techniques over the period 1973–2009.

Findings – Our main findings are that (i) there is significant evidence that both variables contain a unit root; (ii) the oil price and the US exchange rate are strongly linked in the short run; and finally (iii) there are some signs of nonlinearity in the oil–exchange rate relationship.

Originality – Using recent econometric techniques, we show that exchange rates are not a fundamental determinant of oil prices but exchange rate changes help to better forecast oil prices in the short run.

Citation

El Hedi Arouri, M. and Jawadi, F. (2010), "Chapter 6 Oil Prices and Exchange Rates: Some New Evidence Using Linear and Nonlinear Models", Jawadi, F. and Barnett, W.A. (Ed.) Nonlinear Modeling of Economic and Financial Time-Series (International Symposia in Economic Theory and Econometrics, Vol. 20), Emerald Group Publishing Limited, Leeds, pp. 121-141. https://doi.org/10.1108/S1571-0386(2010)0000020011