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Oil Price & Exchange Rate: A Comparative Study

Oil Price & Exchange Rate: A Comparative Study between Net Oil Exporting and Net Oil Importing Countries. MUKHRIZ IZRAF AZMAN AZIZ. Lancaster University. ESDS International Annual Conference 2009 30 th November 2009 Institute of Materials, London. Introduction.

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Oil Price & Exchange Rate: A Comparative Study

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  1. Oil Price & Exchange Rate: A Comparative Study between Net Oil Exporting and Net Oil Importing Countries MUKHRIZ IZRAF AZMAN AZIZ Lancaster University ESDS International Annual Conference 2009 30th November 2009Institute of Materials, London

  2. Introduction • The paper is about : Oil price fluctuations & its relationship with exchange rates • The instability in the oil market in recent years affect many sectors in the economy

  3. Introduction • Evidence to link oil price fluctuations to changes in GDP [Hamilton (1986);Burbidge and Harrison (1984) and Rotenberg and Woodford (1996)]

  4. Introduction • Less attention has been paid to the relationship between exchange rates and oil price fluctuations • The recent surge in oil prices till mid-2007 was followed by depreciation in the US dollar and other major currencies.

  5. Introduction • The potential significance of the price of oil for exchange rate movements has been noted by, inter alia (Golub, 1983, Krugman, 1983) • Evidence of long run relationship between oil price & exchange rate -Lee and Ni (1995), Hooker (1996)

  6. Introduction • Impacts of oil price fluctuations differ between oil importing and oil exporting countries • Oil price increase may lead to exchange rate appreciation in oil exporting countries (Korhonen and Juurikkala, 2009) • For oil importing countries , oil price increase may lead to exchange rate depreciation (Chen and Chen, 2007)

  7. Objective • To empirically estimate the impacts of oil price fluctuations on exchange rate between oil importing and oil exporting countries • To determine if the impacts oil price fluctuations differ between these two groups of countries

  8. Objective Model to Estimate qit = αi + β1idrrit + β2iroilt • where qit is real exchange rate • where drrit is real int. rate diff • where roilt is real oil price in US dollar

  9. Method and Data • The paper uses 8 countries consisting of 5 net oil importing countries and 3 net oil exporting countries • Data is monthly panel data from 1980:1 to 2008:11.

  10. Method and Data • To estimate the long run impacts of oil price shocks on real exchange rate, the paper employs Pesaran (1999) Pooled Mean Group Estimator (PMG) • Uses another two estimators for robustness check : MG and DFE

  11. Method and Data • Estimation procedures involve 3 steps: • 1st - Perform panel unit root test –testing for stationarity of the data • Not a normal practice in econometric using panel data • But is necessary in this paper because of time series nature of data

  12. Method and Data • Estimation procedures involve 3 steps: • 2nd -Testing for panel cointegration –determine if long run relationship exist • 3rd -Estimating long run relationship using(PMG)

  13. Estimation Results: Unit Root Test Panel Unit Root Tests for Panel of All Countries All variables are non-stationary at levels

  14. Estimation Results: Unit Root Test Panel Unit Root Tests for Panel of All Countries • all variables are stationary after 1st difference

  15. Estimation Results: Panel Coint.Test Kao (1999) Residual Cointegration Tests *Evidence of cointegration is found in the data

  16. Estimation Results: Panel Coint.Test Maddala & Wu (1999) Panel Coint. Test for Panel of All Countries *Evidence of cointegration is found in the data

  17. Estimation Results: PMG Estimator Panel of 8 Countries Positive relationship : oil price increase leads to exc. rate depreciation

  18. Summary and Conclusion • The paper finds evidence of positive relationship between oil price & exchange rate among oil importing countries ; i.e. increase in oil price exch. rate depreciation (weakening of currency)

  19. Summary and Conclusion • However, no evidence of negative oil price – exchange rate relationship is found for oil exporting countries: i.e oil price increase leads to exchange rate appreciation • Perhaps the lack of evidence for oil exporting countries is due to selection of countries in the sample

  20. Summary and Conclusion • Mainly, the oil exporting countries are not main OPEC countries where oil account for major export contribution • Interest rate differential is negatively significant for all country groupings.

  21. THANK YOU

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