Oil Price and the Dollar
Keywords:oil prices, effective exchange rate, net foreign asset position, co-integration, causality, error correction model,
The aim of this paper is to test whether there is a stable long-term relationship between oil prices and the U.S. effective exchange rate, expressed in real terms. To this end, we perform co-integration and causality tests between the two variables. Our results show that causality runs from oil prices to the exchange rate. Moreover, as we investigate the channels through which oil prices affect the dollar exchange rate, we find out that the link between the two variables is transmitted through the U.S. net foreign asset position.
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