Estimation of long-run relationship between crude oil price and real exchange rate of US dollar

Document Type : پژوهشی

Authors

Mahmood Hooshmand

Reza Fahimi Dooab

https://doi.org/10.22067/pm.v17i30.27240

Abstract

Crude oil price and the U.S. effective exchange rate are two main economic variables that have had real effects on world welfare situation. The aim of this paper is to test whether there is a stable long-run relationship between oil prices and the U.S. dollar, expressed in real term. To this end, we perform co-integration and causality tests between the two variables, using quarterly data from 1985:1 to 2008:4. Our results show that a 10% rise in the oil price coincides with a 1/8% depreciation of dollar in long-run, and that the causality runs from oil price to the dollar. Furthermore, we estimate the Vector Error Correction Model (VECM) to analyze the short-run behavior of real effective exchange rate and the speed of adjustment when it deviates from its long-run path. Results show that the speed of adjustment is 4/3 percent for each period that means in each period (or each season) the deviation of real effective exchange rate dollar from long-run path shrink to reach its long-run path.

Keywords

Price of crude oil

effective exchange rate

Johansen-Juselius method

error correction model

co-integration

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