Oil Prices and Exchange Rates: Measurement Matters

Jaime Marquez ()
Additional contact information
Jaime Marquez: International Economics and Finance Group, School of Advanced International Studies, Johns Hopkins University, Washington, DC 20036, USA

Commodities, 2022, vol. 1, issue 1, 1-15

Abstract: This paper examines the relevancy of price measurement for characterizing the relation between real oil prices and real exchange rates. The current empirical literature shows a consensus on using the U.S. CPI to deflate the nominal oil price simply because of its numerous advantages. However, reliance on the U.S. CPI assumes that the worldwide alternative to a barrel of oil is the U.S. consumption basket. There are, however, alternative baskets, and I consider two: the price of gold and the IMF Global Commodity Price Index. Inspection of the results reveals that the relation between real oil prices and real exchange rates is sensitive to the choice of deflator for the price of oil and to the use of effective or bilateral exchange rates. Specifically, using the IMF’s Global Commodity Price Index as a deflator reveals that real oil prices and real exchange rates (effective or bilateral) are clustered along a long-run relation with unitary elasticity. Further, this choice of deflator has the lowest forecast errors. To be sure, much work remains to be completed along the lines of measurement and estimation methods. However, extending the results of this paper will emphasize its main point—namely, that measurement matters.

Keywords: WTI price of oil; Johansen cointegration; effective exchange rates; IMF’s Global Commodity Price Index; price of gold (search for similar items in EconPapers)
JEL-codes: C0 C1 C2 C3 C4 C5 C6 C7 C8 C9 D4 E3 E6 F0 F1 F3 F4 F5 F6 G1 O1 O5 Q1 Q2 Q4 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.mdpi.com/2813-2432/1/1/5/pdf (application/pdf)
https://www.mdpi.com/2813-2432/1/1/5/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jcommo:v:1:y:2022:i:1:p:5-64:d:912997

Access Statistics for this article

Commodities is currently edited by Ms. Wendy Yu

More articles in Commodities from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().