Abstract
This paper studies the impact that oil prices have had on the floating exchange rate (ER) of the Dominican peso during the 1990–2008 period. The existing empirical literature has documented a link between these two variables for large developed economies and oil-producing countries, always including the 1970s oil crises in their sample periods. Few authors analyze the case of small open economies dependent on oil imports. Since the acceleration of economic growth in the Dominican Republic during the last decade has greatly increased its degree of external energy dependence, this country’s experience presents an ideal case study. We estimate the influence that changes in international gasoline prices have on the real exchange rate between the Dominican peso and the United States dollar. The cointegrated nature of the gasoline price and ER time series are tested and a vector error correction model is developed. Our results indicate that a 10% rise in the price of gas coincides with a 1.2% depreciation of the peso in the long run and that the causality runs from gas prices to the peso.
Similar content being viewed by others
References
Akram QF (2004) Oil prices and exchange rates: Norwegian evidence. Econ J 7(2): 476–504
Amano RA, van Norden S (1998a) Oil prices and the rise and fall of the US real exchange rate. J Int Money Finance 17: 299–316
Amano RA, van Norden S (1998b) Exchange rates and oil prices. Rev Int Econ 6(4): 683–694
Benassy-Quere A, Mignon V, Penot A (2007) China and the relationship between the oil price and the Dollar. Energy Policy 35: 5795–5805
Bergvall A (2004) What determines real exchange rates? The Nordic countries. Scand J Econ 106(2): 315–337
Brown SPA, Phillips KR (1986) Exchange rates and world oil prices. Economic review. Federal Reserve Bank of Dallas, 1–10 Mar 1986
Chaudhuri K, Daniel BC (1998) Long-run equilibrium real exchange rates and oil prices. Econ Lett 58: 231–238
Chen S, Chen H (2007) Oil prices and real exchange rates. Energy Policy 29: 390–404
Cooper R (1996) Changes in exchange rates and oil prices for Saudi Arabia and other OPEC members. J Energy Dev 20(1): 109–128
Froot KA, Rogoff K (1995) Perspectives on PPP and long-run real exchange rates. In: Grossman GM, Rogoff K (eds) Handbook of international economics, vol 3. Elsevier, New York, pp 1647–1688
Golub SS (1983) Oil prices and exchange rates. Econ J 93: 576–593
Grayson GW (1988) Oil and Mexican foreign policy. University of Pittsburgh Press, Pittsburgh, PA
Johansen S, Juselius K (1992) Testing structural hypothesis in a multivariate cointegration analysis of PPP and the UIP for UK. J Econ 53: 169–209
Joyce JP, Kamas L (2003) Real and nominal determinants of real exchange rates in Latin America: short-run dynamics and long-run equilibrium. J Dev Stud 39(6): 155–182
Rautava J (2004) The role of oil prices and the real exchange rate in Russia’s economy—a cointegration approach. J Comp Econ 32: 315–327
Taylor MP (1995) The economics of exchange rates. J Econ Lit 33(1): 13–47
UNDP: (2005) Informe Nacional de Desarrollo Humano. United Nations Development Program, Santo Domingo, Dominican Republic
Wang P, Dunne P (2003) Real exchange rate fluctuations in East Asia: generalized impulse-response analysis. Asian Econ J 17(2): 185–203
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Méndez-Carbajo, D. Energy dependence, oil prices and exchange rates: the Dominican economy since 1990. Empir Econ 40, 509–520 (2011). https://doi.org/10.1007/s00181-010-0340-4
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s00181-010-0340-4