Time-varying relationship between oil price and exchange rate

César Castro Rozo and Rebeca Jiménez-Rodríguez

MPRA Paper from University Library of Munich, Germany

Abstract: This paper contributes to better understand the dynamic interaction between U.S. effective exchange rate (EER) and oil price by considering a Time-Varying Parameter VAR model with the use of monthly data from 1974 to 2017. Our findings show a depreciation after an oil price shock in the short-run for any period of time, although the pattern of long-run responses of U.S. EER is diverse across different period of time, with an appreciation being observed before the mid-2000s and a depreciation afterwards. This diversity of response should lead policy makers to react differently in order to counteract such shocks. Furthermore, the reaction of oil price to an appreciation of U.S. EER is negative, with the response being similar in the short-run but different in the long-run for each period of time. Thus, the different responses may generate different adverse effects on investment and the knowledge of such effects may help financial investors to diversify their investments in order to optimize the risk-return profile of their portfolios.

Keywords: Oil price; Exchange rate; TVP-VAR model (search for similar items in EconPapers)
JEL-codes: F31 F32 Q31 Q37 (search for similar items in EconPapers)
Date: 2018-03-28
New Economics Papers: this item is included in nep-ene and nep-ets
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:87879

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