Dynamic interactions between oil price and exchange rate

This paper contributes to better understand the dynamic interactions between effective exchange rate (EER) and oil price for an oil-importing country like the U.S. by considering a Time-Varying Parameter VAR model with the use of monthly data from 1974:01 to 2019:07. Our findings show a depreciation...

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Bibliographic Details
Published in:PloS one 2020-08, Vol.15 (8), p.e0237172-e0237172
Main Authors: Castro, Cesar, Jimenez-Rodriguez, Rebeca
Format: Article
Language:English
Subjects:
American dollar
Biology and Life Sciences
Crude oil
Crude oil prices
Depreciation
Economic aspects
Energy economics
Engineering and Technology
Foreign exchange rates
International finance
Investment
Investments
Oil
Petroleum
Physical Sciences
Prices and rates
Social Sciences
Stock exchanges
Studies
Variables
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Summary:This paper contributes to better understand the dynamic interactions between effective exchange rate (EER) and oil price for an oil-importing country like the U.S. by considering a Time-Varying Parameter VAR model with the use of monthly data from 1974:01 to 2019:07. 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 time periods, with an appreciation being observed before the mid-2000s and after the mid-2010s, and a depreciation between both periods. 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 and different over time, which may generate different adverse effects on investment. The knowledge of such effects may help financial investors to diversify their investments in order to optimize the risk-return profile of their portfolios.
ISSN:1932-6203
1932-6203
DOI:10.1371/journal.pone.0237172