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On the impact of oil price volatility on the real exchange rate–terms of trade nexus: Revisiting commodity currencies

Virginie Coudert (), Cécile Couharde and Valérie Mignon ()

No 2014-3, EconomiX Working Papers from University of Paris Nanterre, EconomiX

Abstract: The aim of this paper is to study the relationship between terms of trade and real exchange rates of commodity-producing countries on both the short and the long run. We pay particular attention to the dominant role played by oil among commodities by investigating the potential non-linear effect exerted by the situation on the oil market on the real exchange rate - terms of trade nexus. To this end, we rely on the panel smooth transition regression methodology to estimate the adjustment process of the real effective exchange rate to its equilibrium value depending on the volatility on the oil market. Considering a panel of 52 commodity exporters and 17 oil exporters over the 1980-2012 period, our findings show that while exchange rates are mainly driven by fundamentals in the low-volatility regime, they are mostly sensitive to changes in terms of trade when oil price variations exceed a certain threshold. The commodity-currency property is thus at play in the short run only for important variations in the oil price.

Keywords: commodity currencies; oil price; non-linearity. (search for similar items in EconPapers)
JEL-codes: C23 F31 Q43 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2014
New Economics Papers: this item is included in nep-ene, nep-int and nep-opm
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Working Paper: On the Impact of Oil Price Volatility on the Real Exchange Rate - Terms of Trade Nexus: Revisiting Commodity Currencies (2013) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:drm:wpaper:2014-3

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