Is there a Homogeneous Causality Pattern between Oil Prices and Currencies of Oil Importers and Exporters?
Although the link between oil prices and dollar exchange rates has been frequently analyzed, a clear distinction between prices and nominal exchange rate dynamics and a clarifi cation of the issue of causality has not been provided. In addition, previous studies have mostly neglected nonlinearities which for example may stem from exogenous oil price shocks. Using monthly data for various oil-exporting and oil-importing countries, this study contributes to the clarifi cation of those issues. We discriminate between long-run and time-varying short-run dynamics, using a Markov-switching vector error correction model. In terms of causality, the results diff er between the economies under observation but suggest that the most important causality runs from exchange rates to oil prices, with a depreciation of the dollar triggering an increase in oil prices. On the other hand, changes in nominal oil prices are responsible for ambiguous real exchange rate eff ects mostly through the price diff erential and partly also through a direct infl uence on the nominal exchange rate. Overall, the fact that the adjustment pattern frequently diff ers between regimes underlines the fact that the relationships are subject to changes over time, suggesting that nonlinearities are an important issue when analyzing oil prices and exchange rates.