Common Trends and Common Cycles in Oil Price and Real Exchange Rate

Hem C. Basnet, Puneet Vatsa and Subhash Sharma ()
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Hem C. Basnet: Department of Business, Chadron State College, 1000 Main St., Chadron, NE, USA
Subhash Sharma: Department of Economics, Southern Illinois University, Carbondale, IL, USA

Global Economy Journal (GEJ), 2014, vol. 14, issue 2, 249-263

Abstract: This study explores the long- and short-run movement between oil prices and the real exchange rates of two large oil-exporting countries – Canada and Norway. Cointegration and serial correlation common features tests are jointly used to identify the long-term common trend and short-term common cycles. Our test results find that oil prices and the real exchange rates of the Canadian Dollar and the Norwegian Krone have two shared trends and one shared cycle. The trend–cycle decomposition shows a great deal of positive comovement among the trend and cyclical components. The two currencies show economic dynamics very similar to crude oil prices. They do not exhibit any qualitative differences in the trajectory of the trend and cycles when controlling for different crude oil prices. Our results indicate that oil price fluctuations play significant role in explaining the exchange rate movements of oil-exporting countries.

Keywords: oil price; real exchange rates; common features; US Dollar; decomposition (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1515/GEJ-2013-0042

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