Do Exchange Rates Respond Asymmetrically to Crude Oil Market Shocks? Insights from BRICS and Pakistan

Rashid Abdul (), Jehan Zainab, Tahira Maria and Javed Amir
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Rashid Abdul: International Islamic University, Islamabad, Pakistan.
Jehan Zainab: Fatima Jinnah Women University, Rawalpindi, Pakistan.
Tahira Maria: International Islamic University, Islamabad, Pakistan
Javed Amir: Universita G. D‘Annunzia di, Chieti-Pescara, Italy

Zagreb International Review of Economics and Business, 2024, vol. 27, issue 1, 31-62

Abstract: The shocks in the crude oil market are unlikely to have symmetric impacts on exchange rates, especially over various time periods. Furthermore, in low- and high-volatility regimes, exchange rates are predicted to respond differently to oil market shocks. By employing Markov-switching model and state-space model, this research empirically investigates whether oil market shocks exert asymmetric impacts on exchange rates, across the time and across different levels of volatility. In doing so, the study utilizes monthly data from January 1994-September 2017 for BRICS countries and Pakistan. The findings indicate that although oil supply shocks are mostly insignificant, oil price shocks appear statistically significant to affect the exchange rates whereas aggregate demand shocks are most volatile and are more likely to cause exchange rate fluctuations. The study concludes that various forms of oil shocks have a wide range of consequences on exchange rate determinations. Nonetheless, exchange rates’ response to oil shocks differ dramatically through low- and high-volatility states, implying that oil shocks exert a time-varying impact on exchange rates. Finally, the findings provide credence to the phenomenon of asymmetry in exchange rate responses to oil market shocks.

Keywords: Exchange rate fluctuations; Oil market shocks; Markov-switching model; state-space model; time-varying estimates (search for similar items in EconPapers)
JEL-codes: C32 E23 Q41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:zirebs:v:27:y:2024:i:1:p:31-62:n:1002

DOI: 10.2478/zireb-2024-0002

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