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.
Similar content being viewed by others
Notes
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.
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.
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.
For more details, see Bai and Perron (1998).
References
Ahmad AH, Hernandez RH (2013) Asymmetric adjustment between oil prices and exchange rates: empirical evidence from major oil producers and consumers. J Int Financ Mark Inst Money 27:306–317
Akram QF (2004) Oil prices and exchange rates: norwegian experience. Econom J 7:476–504
Amano R, Norden SV (1998) Oil prices and the rise and fall of the US real exchange rate. Energy Policy 17:299–316
Apergis N, Payne J (2014) Resurrecting the size effect: evidence from a panel nonlinear cointegration model for the G7 stock markets. Rev Financ Econ 23(1):46–53
Bahmani-Oskooee M, Fariditavana H (2015) Nonlinear ARDL approach, asymmetric effects and the J-curve. J Econ Stud 42(3):519–530
Bahmani-Oskooee M, Fariditavana H (2016) Nonlinear ARDL approach and the J-curve phenomenon. Open Econ Rev 27:51–70
Bahmani-Oskooee M, Ghodsi SH (2016) Do changes in the fundamentals have symmetric or asymmetric effects on house prices? Evidence from 52 states of the United States of America. Appl Econ 48(31):2912–2936
Bahmani-Oskooeea M, Aftab M (2017) On the asymmetric effects of exchange rate volatility on trade flows: new evidence from US–Malaysia trade at the industry level. Econ Model 63:86–103
Bahmani-Oskooee M, Halicioglu F, Hegerty SW (2016) Mexican bilateral trade and the J-curve: an application of the nonlinear ARDL model. Econ Anal Policy 50:23–40
Bahmani-Oskooee M, Amor TH, Harvey H, Karamelikli H (2017a) Is there a J-curve effect in Tunisia’s bilateral trade with her partners? New evidence from asymmetry analysis. Econ Change Restruct. https://doi.org/10.1007/s10644-017-9216-3
Bahmani-Oskooee M, Halicioglu F, Mohammadian A (2017b) On the asymmetric effects of exchange rate changes on domestic production in Turkey. Econ Change Restruct. https://doi.org/10.1007/s10644-017-9201-x
Bai J, Perron P (1998) Estimating and testing linear models with multiple structural changes. Econometrica 66:47–78
Bai J, Perron P (2003) Critical values for multiple structural change tests. Econom J 6:72–78
Basnet HC, Upadhyaya KP (2015) Impact of oil price shocks on output, inflation and the real exchange rate: evidence from selected ASEAN countries. Appl Econ 47(29):3078–3091
Beckmann J, Czudaj R (2013) Is there a homogeneous causality pattern between oil prices and currencies of oil importers and exporters? Energy Econ 40(1):665–678
Beckmann J, Czudaj R, Arora V (2017) The relationship between oil prices and exchange rates: theory and evidence. U.S. Energy Information Administration working paper series, June 2017
Benassy-Quere A, Valerie M, Alexis P (2007) China and relationship between oil price and the dollar. Energy Policy. 35:5795–5805
Benhmad F (2012) Modeling nonlinear granger causality between the oil price and U.S. dollar: a wavelet-based approach. Econ Model 29:1505–1514
Bloomberg SB, Harris ES (1995) The commodity–consumer price connection: fact or fable? Fed Reserve Bank of New York Econ Policy Rev 1:21–38
Brown RL, Durbin J, Evans JM (1975) Techniques for testing the constancy of regression relationships over time. J R Stat Soc 37:149–192
Buetzer S, Habib M, Stracca L (2016) Global exchange rate configurations: do oil shocks matter? IMF Econ Rev 64(3):443–470
Camarero M, Tamarit C (2002) Oil price and Spanish competitiveness: a cointegrated panel analysis. J Policy Model 24(6):591–605
Chaudhuri K, Daniel BC (1998) Long-run equilibrium real exchange rates and oil prices. Econ Lett 58:231–238
Chen SS, Chen HC (2007) Oil prices and real exchange rates. Energy Econ 29:390–404
Chen Y-C, Rogoff K, Rossi B (2010) Can exchange rates forecast commodity prices? Quart J Econ 125(3):1145–1194
Cheng M-Y, Hossain S (2001) Malaysia and the Asian turmoil. Asian-Pacific Law Policy J 1(2):125–143
Chinn M (2000) The usual suspect? Productivity and demand shocks and Asia–Pacific real exchange rates. Rev Int Econ 8(1):20–43
Choudhry T, Hassan S, Papadimitriou F (2014) UK imports, third country effect and the global financial crisis: evidence from the asymmetric ARDL method. Int Rev Financ Anal 32:199–208
Czudaj R, Beckmann J (2013) Oil prices and effective dollar exchange rate. Int Rev Financ 27(1):621–636
Fowowe B (2014) Modelling the oil price–exchange rate nexus for South Africa. Int Econ 140:36–48
Goh SK, McNown R (2015) Examining the exchange rate regime—monetary policy autonomy nexus: evidence from Malaysia. Int Rev Econ Financ 35:292–303
Goh SK, Lim GC, Olekalns N (2006) Deviation from uncovered interest parity in Malaysia. Appl Financ Econ 16(10):745–759
Golub S (1983) Oil prices and exchange rates. Econ J 93:576–593
Gregory AW, Nason JM, Watt DG (1996) Testing for structural breaks in cointegrated relationships. J Econom 71:321–341
Hamilton J (1983) Oil and the macroeconomy since world war II. J Polit Econ 91(2):228–248
Hamilton J (2011) Historical oil shocks. NBER working paper no. 16790
Houben A (1997) Exchange rate policy and monetary strategy options in the Philippines: the search for stability and sustainability. IMF paper on policy analysis and assessment, PPAA/97/4
Huang Y, Guo F (2007) The oil price shocks on China’s real exchange rate. China Econ Rev 18:403–416
Jammazia R, Lahianib A, Nguyenc D (2015) A wavelet-based nonlinear ARDL model for assessing the exchange rate pass-through to crude oil prices. J Int Financ Mark Inst Money 34(2015):173–187
Kejriwal M, Perron P (2010) Testing for multiple structural changes in cointegrated regression models. J Bus Econ Stat 28(4):503–522
Kisswani K (2016a) Does oil price variability affect ASEAN exchange rates? Evidence from panel cointegration test. Appl Econ 48(20):1831–1839
Kisswani K (2016b) Re-exploring the nexus between oil prices and ASEAN exchange rates: an ARDL bounds testing approach. J Econ Res 21:319–342
Kisswani K (2017) Evaluating the GDP—energy consumption nexus for the ASEAN-5 countries using nonlinear ARDL model. OPEC Energy Rev 41(4):318–343
Kisswani K, Elian M (2017) Exploring the nexus between oil prices and sectoral stock prices: nonlinear evidence from Kuwait stock exchange. Cogent Econ Financ 5(1–1286061):1–17
Krugman P (1983) Oil and the dollar in economic interdependence and flexible exchange rates. In: Bhandari J, Putnam B (eds) Economic interdependence and flexible exchange rates. MIT Press, Cambridge
Liang C-C, Lin J-B, Hsu H-C (2013) Reexamining the relationships between stock prices and exchange rates in ASEAN-5 using panel granger causality approach. Econ Model 32(2013):560–563
Lizardo RA, Mollick AV (2010) Oil price fluctuations and US dollar exchange rates. Energy Econ 32:399–408
Maki D (2012) Tests for cointegration allowing for an unknown number of breaks. Econ Model 29(5):2011–2015
Mohammadi H, Jahan-Parvar M (2012) Oil price and exchange rates in oil exporting countries: evidence from TAR and M-TAR models. Int Econ Financ 36(3):766–779
Narayan P, Narayan S, Prasad A (2008) Understanding the oil price-exchange rate nexus for the Fiji islands. Energy Econ 30:2686–2696
Narayan S (2013) Foreign exchange markets and oil prices in Asia. J Asian Econ 28:41–50
Newey WK, West KD (1987) A simple positive semi-definite heteroscedasticity and autocorrelation consistent covariance matrix. Econometrica 55:1029–1054
Pershin V, Molero JC, de Gracia FP (2016) Exploring the oil prices and exchange rates nexus in some African economies. J Policy Model 38(2016):166–180
Pesaran MH, Shin Y (1999) An autoregressive distributed lag modelling approach to cointegration analysis. In: Strom S (ed) Econometrics and economic theory in the 20th century: the Ragnar frisch centennial symposium, Cambridge University Press
Pesaran MH, Shin Y, Smith RJ (2001) Bounds testing approaches to the analysis of level relationships. J Appl Econom 16:289–326
Phillips P, Perron P (1988) Testing for a unit root in time series regression. Biometrika 75:335–346
Ramakrishnan U, Vamvakidis A (2002) Forecasting inflation in Indonesia. IMF working paper no. 111
Reboredo JC (2012) Modeling oil price and exchange rate co-movements. J Policy Model 34(3):419–440
Rogoff K (1991) Oil, productivity, government spending and the real yen dollar exchange rate. Working paper, federal reserve bank of San Francisco, San Francisco, CA
Romilly P, Song H, Liu X (2001) Car ownership and use in Britain: a comparison of the empirical results of alternative cointegration estimation methods and forecasts. Appl Econ 33:1803–1818
Sadorsky P (2000) The empirical relationship between energy futures prices and exchange rates. Energy Econ 22:253–266
Shin Y, Yu B, Greenwood-Nimmo M (2013) Modelling asymmetric cointegration and dynamic multipliers in an ARDL framework. In: Horrace WC, Sickles RC (eds) Festschrift in honor of Peter Schmidt. Springer, New York
Supel T (1978) The U.S. Economy in 1977 and 1978. Fed Reserve Bank Minneap Quart Rev 2(1):1–6
Tiwari AK, Dar AB, Bhanja N (2013a) Oil price and exchange rates: a wavelet-based analysis for India. Econ Model 31:414–422
Tiwari AK, Mutascu MI, Albulescu CT (2013b) The influence of the international oil prices on the real effective exchange rate in Romania in a wavelet transform framework. Energy Econ 40(2013):714–733
Toda HY, Yamamoto T (1995) Statistical inferences in vector autoregressions with possibly integrated processes. J Econom 66:225–250
Turhan I, Sensoy I, Hacihasanoglu E (2014) A comparative analysis of the dynamic relationship between oil prices and exchange rates. J Int Fin Mark Inst Money 32(C):397–414
Van Hoang T, Lahiani A, Heller D (2016) Is gold a hedge against inflation? New evidence from a nonlinear ARDL approach. Econ Model 54:54–66
Wu C-C, Chung H, Chang Y-H (2012) The economic value of co-movement between oil price and exchange rate using copula-based GARCH models. Energy Econ 30(1):270–282
Zhang YJ, Wei YM (2010) The crude oil market and the gold market: evidence for cointegration, causality and price discovery. Resour Policy 35(3):168–177
Zhang YJ, Fan Y, Tsai HT, Wei YM (2008) Spillover effect of US dollar exchange rate on oil prices. J Policy Model 30:973–991
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.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
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
Received:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10644-018-9229-6