Investigating a structural change and dependence between oil price and exchange rate in oil dependent countries

Abstract

It is well known in the academic literature that correlations between oil price and exchange rate. There is a stable long-run relationship between oil prices and the real effective exchange rate (Amano and VanNorden, 1998). A rise in the oil price can lead to either an appreciation or a depreciation of the exchange rate (Benassy-Quere et al. 2007). However, most studies have focused on the impact of oil prices on exchange rates without considering the movements between oil prices and exchange rates. This study aims to investigate the dependence and structural change between real oil prices and the real effective exchange rate of oil-dependent countries and is the first to apply the regime-switching base on R vine copula approach between real oil price and real exchange rate. This study chooses the sample for oil-dependent countries, consisting of oil proven reserves, oil production, oil consumption, and oil imports, each group has 5 countries and a total have 11 countries. This study uses monthly data from 2007-2020. The results show oil return has a negative relationship with the exchange rates returns of most countries in the oil proven reserves group, oil consumption group, and oil imports group. For the production group, oil return has a positive relationship with all exchange rates returns except Saudi Arabia. We also found that under the Markov-switching model, the probability of oil and exchange rates in abnormal states is higher than the probability of normal states.