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

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Published/Copyright: April 5, 2014
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Global Economy Journal
From the journal Global Economy Journal Volume 14 Issue 2

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
JEL Classification: F31; F37; F41

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  1. 1

    Reboredo (2012) examines comovement between oil prices and the exchange rates of 21 countries and documents some evidence of comovement between oil prices and exchange rates. That study includes a variety of countries such as developed, emerging, net oil importing, net oil exporting etc. and the methodology used to detect comovement is different from the one we are intending to use.

  2. 2
  3. 3

    Retrieved from http://www.eia.doe.gov/cabs/Norway/Oil.html on February 16, 2010.

  4. 4

    The data on the consumer price indices of Canada and Norway and on the nominal exchange rates of the Canadian Dollar and the Norwegian Krone vis-à-vis the US Dollar and the Euro have been obtained from the websites of the Bank of Canada and the Norges Bank, respectively. The data on the consumer price index of the US and the WTI oil price have been obtained from the website of the Federal Reserve Bank at Saint Louis. The consumer price index data for the Euro zone has been obtained from the website of the European Central Bank.

  5. 5

    The data on the Brent crude oil price has been obtained from the website of the European Central Bank.

  6. 6

    This decomposition is explained in more detail in Vahid and Engle (1993, 346–47).

  7. 7

    We use the F-test approximation instead of the test statistic with a χ2 approximation provided by Vahid and Engle (1993) as it yields superior small-sample results (Rao 1973).

  8. 8

    Due to the scaling, the trend component of the Norwegian Krone appears to be muted in Figures 1 and 3. The individual plot and correlation coefficients ensure that its long-run movement is identical with the WTI price.

Published Online: 2014-4-5
Published in Print: 2014-6-1

©2014 by Walter de Gruyter Berlin / Boston

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  4. At the Core of the International Financial System
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  6. What’s News
  7. What Motivates China to Invest So Heavily in U.S. Treasury Securities?
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  9. Common Trends and Common Cycles in Oil Price and Real Exchange Rate
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https://doi.org/10.1515/gej-2013-0042
Keywords for this article
oil price; real exchange rates; common features; US Dollar; decomposition

Articles in the same Issue

  1. Frontmatter
  2. Articles
  3. Foreign Investment, Institutional Quality, Public Expenditure, and Activity of Venture Capital Funds in Emerging Market Countries
  4. At the Core of the International Financial System
  5. The Role of Internet Use on International Trade: Evidence from Asian and Sub-Saharan African Enterprises
  6. What’s News
  7. What Motivates China to Invest So Heavily in U.S. Treasury Securities?
  8. China’s Real Capital Crisis
  9. Common Trends and Common Cycles in Oil Price and Real Exchange Rate
  10. Targeted Trade-Related Policies and Manufacturing Firm Productivity in Eastern Europe and Central Asia: Effect of Corruption
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