Keyword

USD; Oil Price; Real Exchange Rate; Error Correction Model

Abstract

          The relationship between the oil price and the real exchange rate of the U.S. dollar is a topic of great interest and wide discussion in economic literature. This paper is aimed at analyzing this relationship. The currencies that were used for the study are the U.S. dollar, British pound, Swiss franc, Swedish Krona, Japanese Yen, and Canadian dollar. In order to actualize this analysis, we developed and used a model based on a monetary approach to exchange rates; the model includes such variables as real money balances, real GDP of countries, differences between domestic and foreign interest rates, and the real price of oil. Monthly time series data from 1995 to 2015 was used to make an econometric analysis of the topic. Before testing the model, the data was tested to be stationary and the data series found to be in order of integration. An error correction model was used and the determinants of the exchange rate were estimated. The results of the final model showed that an increase in oil price, caused a minor appreciation of dollar against the currencies included in the work.


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