Oil prices and the US effective exchange rate: A hidden cointegration analysis

Panagiotis Rafailidis, Constantinos Katrakilidis



We investigate the long-run relationship between the US Dollar effective exchange and the oil prices (wti) over the period from January 1986 to August 2014. We allow for the relationship to be nonlinear by employing the hidden cointegration technique of Granger and Yoon (2002) and Schorderet (2004). The Quandt – Andrews approach allows accounting for structural breaks. The results reveal a long-run relationship between the two markets.

Full Text:




Ahmad AH, Hernandez RM. (2013). Asymmetric adjustment between oil prices and exchange rates: Empirical evidence from major oil producers and consumers, Journal of International Financial Markets, Institutions & Money 27: 306-317.

Akram QF. (2004). Oil prices and exchange rates - Norwegian evidence, Econometric Journal 7: 76-504.

Amano RA, van Norden S.( 1998). Oil prices and the rise and fall of the US real exchange rate. Journal of International Money and Finance 17: 299-316.

Andrews DW K. (1993). Tests for Parameter Instability and Structural Change with Unknown Change Point. Econometrica 61(4): 821-856.

Andrews DWK, Ploberger W. (1994). Optimal tests when a nuisance parameter is present only under the alternative. Econometrica 62(6): 1383–1414.

Bénassy-Quéré A, Mignon V, Penot A. (2005). China and the relationship between the oil price and the dollar. Working Paper, CEPII.

Bernanke B. (1983). Nonmonetary effects of the financial crisis in the propagation of the Great Depression. American Economic Review 73: 257–276.

Brown PAS, Yücel MK. (2002). Energy prices and aggregate economic activity: an interpretative survey. The Quarterly Review of Economics and Finance 42: 193−208.

Buetzer S, Habib MM, Stracca L. (2012). Global exchange rate configurations: Do oil shocks matter? Working Paper No. 1442, European Central Bank.

Burbridge J, Harrison A. (1984). Testing for the Effects of Oil-Price Rises Using Vector Autoregressions. International Economic Review 25(1): 459-484.

Chen SS, Chen HC. (2007). Oil prices and real exchange rates. Energy Economics 29(3): 390–404.

Cheng KC. (2008). Dollar depreciation and commodity prices. IMF World Economic Outlook, International Monetary Fund, Washington D.C 72-75.

Cheung Y-W, MD Chinn, AG Pascual. (2005). Empirical Exchange Rate Models of the Nineties: Are they Fit to Survive?. Journal of International Money and Finance 24: 115-1175.

Coleman S, Cuestas JC, Mourelle E. (2010). A nonlinear analysis of the relationship between real exchange rates and real oil prices in African countries, CSAE Conference 2010-Economic Development in Africa, 21st -23rd March, St Catherine's College, Oxford.

Dickey DA, Fuller WA. (1979). Distribution of the Estimators for Autoregressive Time-Series with a Unit Root. Journal of American Statistical Association 74: 427-431.

Elder J, Serletis A. (2010). Oil price uncertainty. Journal of Money, Credit and Banking 42(6): 1137–1159.

Enders W, Dibooglu D. (2001). Long-Run Purchasing Power Parity with Asymmetric Adjustment. Southern Economic Journal 68(2): 433-445.

Engle RF, Granger CWJ. (1987). Cointegration and error correction: representation, estimation and testing. Econometrica 55: 251–277.

Ewing BT, Hammoudeh SM, Thompson MA., (2006). Examining asymmetric behavior in US petroleum futures and spot prices. Energy Journal 27: 9–24.

Frankel J, A Rose. (1995). Empirical Research on Nominal Exchange Rates. Handbook of International Economics 3: 1689-1729.

Golub SS. (1983). Oil Prices and Exchange Rates. Economic Journal 93: 576-93.

Granger CWJ, Yoon G. (2002). Hidden Cointegration. Working Paper No. 2002-02, University of California, San Diego.

Gregory AW, Hansen BE. (1996a). Residual-based tests for cointegration in models with regime shifts. Journal of Econometrics 70: 99-126.

Gregory AW, Hansen BE. (1996b). Tests for cointegration in models with regime and trend shifts. Oxford Bulletin of Economics and Statistics 58: 555-560.

Gregory AW, Nason JM, Watt DG. (1996). Testing for structural breaks in cointegrated relationships. Journal of Econometrics 71: 321-341.

Hamilton JD. (1983). Oil and the Macroeconomy Since World War II. Journal of Political Economy 91(2): 228-48.

Hau H, H Rey.(2004). Can Portfolio Rebalancing Explain the Dynamics of Equity Returns, Equity Flows, and Exchange Rates?. American Economic Review 94: 126-133.

Hooker MA. (1996). What Happened to the Oil Price-Macroeconomy Relationship?. Journal of Monetary Economics 38: 195-213.

Johansen S. (1991). Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models. Econometrica 59: 1551-1580.

Johansen S. (1995). Likelihood-Based Inference in Cointegrated Vector Autoregressive Models. Oxford University Press, New York.

Kilian L. (2009). Not all oil shocks are alike: disentangling demand and supply shocks in the crude oil market. American Economic Review 99(3): 1053- 1069.

Krugman P. (1983a). Oil and the dollar In Economic Interdependence and Flexible Exchange Rates. Cambridge: MIT Press.

Krugman P. (1983b). Oil shocks and exchange rate dynamics In Exchange Rates and International Macroeconomics, University of Chicago Press.

Kwiatkowski D, Phillips PCB, Schmidt P, Shin Y. (1992). Testing the null hypothesis of stationarity against the alternative of a unit root: How sure are we that economic time series have a unit root?, Journal of Econometrics 54: 159-178.

Lee K, Ni S, Ratti RA. (1995). Oil shocks and the Macroeconomy: The role of price variability. Energy Journal 16: 39-56.

Lizardo RA, Mollick AV. (2010). Oil price fluctuations and US dollar exchange rates. Energy Economics 32: 399-408.

Loungani P. (1986). Oil Price Shocks and the Dispersion Hypothesis. Review of Economics and Statistics 58: 536-539.

Meese RA, K Rogoff. (1983a). Empirical Exchange Rate Models of the Seventies: Do They Fit Out-Of-Sample?. Journal of International Economics 14: 3-24.

Mork KA.( 1994). Business cycles and the oil market. The Energy Journal 15: 15–38.

Narayan PK, Narayan S, Smyth R. (2008). Are oil shocks permanent or temporary? Panel data evidence from crude oil and NGL production in 60 countries. Energy Economics 30(3): 919–936.

Obstfeld M, Rogoff K. (1996). Foundations of International Macroeconomics, MIT Press.

Papapetrou E. (2001). Oil Price Shocks, Stock Market, Economic Activity and Employment in Greece. Energy Economics 23: 511-532.

Perron P. (1989). The great crash, the oil price shock, and the unit root hypothesis. Econometrica 57(6): 1361–1401.

Phillips PCB, Ouliaris S. (1990). Asymptotic Properties of Residual Based Tests for Cointegration. Econometrica 58(1): 165-193.

Phillips PCB, Perron P. (1988). Testing for a Unit Root in Time Series Regression. Biometrica 75: 335-346.

Pierce JL, Enzler JJ. (1974). The effects of external in flationary shocks. Brookings Paper on Economic Activity 1: 13- 61.

Quandt RE. (1960). Tests Of The Hypothesis That A Linear Regression System Obeys Two Separate Regimes. Journal of the American Statistical Association 55(290): 324- 330.

Rossi B. (2013). Exchange Rate Predictability. Journal of Economic Literature 51: 1063-1119.

Schorderet Y. (2003). Asymmetric Cointegration. Working Paper No 2003.01, Department of Econometrics, University of Geneva, Geneva.

Throop A. (1994). A Generalised Uncovered Interest Rate Parity Model of Real Exchange Rates. Federal Reserve Bank Of San Fransisco, mimeo

DOI: https://doi.org/10.17811/ebl.5.4.2016.134-144


  • There are currently no refbacks.

ISSN: 2254-4380