Revisiting the effects of oil prices on exchange rate: asymmetric evidence from the ASEAN-5 countries

Abstract

As the linear analysis of the oil price-exchange rate nexus failed to provide conclusive results, asymmetry analysis and nonlinear models recently emerged as new direction in examining this relationship. As such, this paper investigates the asymmetric relationship between oil prices and exchange rates for selected ASEAN countries, from 1970:Q1 to 2016:Q4. This is done by employing the nonlinear Autoregressive Distributed Lags (NARDL) approach of cointegration developed by Shin et al. (in: Horrace, Sickles (eds) Festschrift in honor of Peter Schmidt, Springer, New York, 2013). Furthermore, this paper pays attention to the importance of the presence of structural breaks in the data. The empirical results show long-run asymmetry for Indonesia and Malaysia only, when structural breaks are taken into consideration. The paper, additionally, examines the causality direction for the oil price-exchange rate nexus using the Toda and Yamamoto (J Econ 66:225–250, 1995) causality test. The findings show mixed results, since a bidirectional causality between oil price (increase and decrease) and exchange rate is found in some cases, but, a unidirectional causality running from oil price (either increase or decrease) to exchange rate, or running from exchange rate to oil price (either increase or decrease), is found in other cases.

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Notes

  1. 1.

    For other applications of the NARDL model, see Apergis and Payne (2014), Choudhry et al. (2014), Van Hoang et al. (2016), Bahmani-Oskooee and Fariditavana (2015), and Kisswani and Elian (2017) among others.

  2. 2.

    However, we did run the analysis using oil price quoted in US dollar (as one referee raised this point). The findings show similar results in terms of cointegration and asymmetric effect. The results are available upon request.

  3. 3.

    The empirical work that examined the oil price-exchange rate nexus have either used the oil price quoted in US dollar, or oil price converted from US dollar into domestic currency using the exchange rate. In this paper, we decided to use the oil price in domestic currency following Chen and Chen (2007) and Narayan (2013). This approach is more appropriate as the variations in oil prices conveyed in domestic currency could be attributed to fluctuations in the national price level, or fluctuations in the exchange rate fluctuations.

  4. 4.

    Although Bahmani-Oskooee and Aftab (2017) describe other methods to test short-run asymmetry such as if the number of lags on the \(\Delta P_{t}^{ + }\) and \(\Delta P_{t}^{ - }\) are different, or, if the size or sign of the estimated coefficients of \(\Delta P_{t - i}^{ + }\) and \(\Delta P_{t - i}^{ - }\) is different at each individual lag, the Wald test remains the most appropriate type of asymmetry test.

  5. 5.

    For more details, see Bai and Perron (1998).

  6. 6.

    See for example: Tiwari et al. (2013a, b), Ahmad and Hernandez (2013), Fowowe (2014), Pershin et al. (2016), Jammazia et al. (2015) and Basnet and Upadhyaya (2015) among others.

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Acknowledgements

The authors would like to express their sincere gratitude to the Editor in Chief and two anonymous reviewers for their invaluable time and input. Their critical comments and suggestions have significantly improved the quality of this paper. The authors are fully responsible for any remaining shortcomings.

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Correspondence to Khalid M. Kisswani.

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Kisswani, K.M., Harraf, A. & Kisswani, A.M. Revisiting the effects of oil prices on exchange rate: asymmetric evidence from the ASEAN-5 countries. Econ Change Restruct 52, 279–300 (2019). https://doi.org/10.1007/s10644-018-9229-6

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Keywords

  • ASEAN
  • Real oil prices
  • Exchange rates
  • NARDL
  • Asymmetry

JEL Classification

  • F31
  • F41
  • Q43
  • O53