Abstract
In this study, we contribute to the literature in twofold. First, we analyse the nexus between oil price uncertainty shock and real exchange rate behavior from a global perspective using the Global Vector Autoregressive (GVAR) framework. Second, we attempt to examine the individual countries’ characteristics in the propagation of global oil price uncertainty to real exchange rate. Using a newly developed measure of oil price uncertainty, our findings confirm a statistically significant exchange rate depreciation effect on 17 of the 32 countries considered with most of them being oil exporting countries although the magnitude of the initial impact is less severe in strong European economies, Canada and China. Our results have important implications for investors and policymakers.
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Notes
In fact, such generalizations have strengthened the policy framework of multilateral institutions like the International Monetary Fund, World Bank, United Nations, European Union, Organization for Economic Cooperation and Development, Organization of the Petroleum Exporting Countries, among others, where the need for the design of policy directions that transcend a single country is crucial. Examples of such generalizations include the international norm for debt sustainability, required sectoral budgetary provisions to achieve sustainable growth and development, convergence criteria for the actualization of a single currency union, among others.
We utilize the oil price uncertainty index developed by Nguyen et al. (2021) and the construction is based on the conditional volatility of the unpredictable component of the real price of oil as measured by the Consumer Price Index (CPI)-deflated nominal values of the conventional US refiners’ acquisition cost for imported crude oil. Technically-minded readers are referred to the work of Nguyen et al. (2021) for further computational details.
Note that the GVAR data are available at https://www.econ.cam.ac.uk/people-files/emeritus/mhp1/GVAR/GVAR.html except the data for the oil uncertainty index which can be obtained from https://sites.google.com/site/nguyenhoaibao/oil-market-uncertainty?authuser=0. Since the GVAR database is of quarterly frequency, the monthly frequency of the oil price uncertainty index is converted to quarterly values by taking three-month averages over a quarter to match the quarterly frequency of the GVAR dataset.
To deal with any inherent structural shift in the model, we allow for time-variation in the GVAR model via the time-varying trade weighting scheme.
The European countries we are referring to here are those within the Euro area.
See the link for the ranking and discussion of economic complexity https://www.visualcapitalist.com/countries-ranked-by-their-economic-complexity/. Highly ranked countries in terms of economic complexity imply a high diversity of exported products and sophisticated and unique exported products (i.e. few other countries produce similar products).
See the link for the ranking of countries by oil consumption per capita https://www.eia.gov/tools/faqs/faq.php?id=709&t=6.
See the link for a recent discussion of how political and economic crisis has thrown Argentina’s energy market into disarray https://ieefa.org/ieefa-brief-political-and-economic-crisis-throws-argentinas-energy-market-into-disarray/.
Orgarnisation of Petroleum Exporting Countries. It is also instructive to note that Saudi Arabia being the only OPEC member nation considered in this analysis, its behaviour may be reflective of other members of the cartel who are often protected by a strong union.
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Musa, A., Salisu, A.A., Abulbashar, S. et al. Oil price uncertainty and real exchange rate in a global VAR framework: a note. J Econ Finan 46, 704–712 (2022). https://doi.org/10.1007/s12197-022-09592-w
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DOI: https://doi.org/10.1007/s12197-022-09592-w