Oil Price

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Oil Price Exchange Rate
A Comparative Study
between Net Oil Exporting and Net Oil Importing
Countries
MUKHRIZ IZRAF AZMAN AZIZ
Lancaster University
ESDS International Annual Conference 2009 30th
November 2009Institute of Materials, London
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Introduction

• The paper is about Oil price fluctuations its
  relationship with exchange rates
• The instability in the oil market in recent years
  affect many sectors in the economy

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Introduction

• Evidence to link oil price fluctuations to
  changes in GDP Hamilton (1986) Burbidge and
  Harrison (1984) and Rotenberg and Woodford (1996)

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Introduction

• Less attention has been paid to the relationship
  between exchange rates and oil price fluctuations
• The recent surge in oil prices till mid-2007 was
  followed by depreciation in the US dollar and
  other major currencies.

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Introduction

• The potential significance of the price of oil
  for exchange rate movements has been noted by,
  inter alia (Golub, 1983, Krugman, 1983)
• Evidence of long run relationship between oil
  price exchange rate -Lee and Ni (1995),
  Hooker (1996)

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Introduction

• Impacts of oil price fluctuations differ between
  oil importing and oil exporting countries
• Oil price increase may lead to exchange rate
  appreciation in oil exporting countries (Korhonen
  and Juurikkala, 2009)
• For oil importing countries , oil price increase
  may lead to exchange rate depreciation (Chen and
  Chen, 2007)

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Objective

• To empirically estimate the impacts of oil price
  fluctuations on exchange rate between oil
  importing and oil exporting countries
• To determine if the impacts oil price
  fluctuations differ between these two groups of
  countries

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Objective

• qit ai ß1idrrit ß2iroilt
• where qit is real exchange rate
• where drrit is real int. rate diff
• where roilt is real oil price in US dollar

Model to Estimate
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Method and Data

• The paper uses 8 countries consisting of 5 net
  oil importing countries and 3 net oil exporting
  countries
• Data is monthly panel data from 19801 to
  200811.

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Method and Data

• To estimate the long run impacts of oil price
  shocks on real exchange rate, the paper employs
  Pesaran (1999) Pooled Mean Group Estimator (PMG)
• Uses another two estimators for robustness check
  MG and DFE

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Method and Data

• Estimation procedures involve 3 steps
• 1st - Perform panel unit root test testing for
  stationarity of the data
• Not a normal practice in econometric using panel
  data
• But is necessary in this paper because of time
  series nature of data

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Method and Data

• Estimation procedures involve 3 steps
• 2nd -Testing for panel cointegration determine
  if long run relationship exist
• 3rd -Estimating long run relationship using(PMG)

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Estimation Results Unit Root Test

• Panel Unit Root Tests for Panel of All Countries

Series in Level Null Hyp. Series in Level Null Hyp. Exc. Rate Oil Price Int. Rate. Dif
Levin, Lin and Chu Unit Root -0.46 (0.32) 1.15 (0.87) 2.89 (0.99)
Breitung t-stat Unit Root 0.17 (0.57) 3.33 (0.99) -2.43 (0.00)
Im, Pesaran Shin Unit Root 0.00 (0.50) 2.17 (0.98) -1.95 (0.02)
ADF-Fisher Unit Root 11.86 (0.75) 3.01 (0.99) 24.40(0.08)
Hadri Z-stat Stationary 10.05 (0.00) 29.24 (0.00) 4.86 (0.00)
All variables are non-stationary at levels
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Estimation Results Unit Root Test

• Panel Unit Root Tests for Panel of All Countries

Series in 1st Diff Null Hyp. Series in 1st Diff Null Hyp. Exc. Rate Oil Price Int. Rate. Dif
Levin, Lin and Chu Unit Root -4.40 (0.00) -52.51(0.00) -73.42 (0.00)
Breitung t-stat Unit Root 1.55 (0.93) -9.71 (0.00) -17.92 (0.00)
Im, Pesaran Shin Unit Root -8.68 (0.00) -37.35 (0.00) -49.52 (0.00)
ADF-Fisher Unit Root 118.77 (0.00) 843.94 (0.00) 1038.81 (0.00)
Hadri Z-stat Stationary 0.07 (0.47) -2.34 (0.99) -1.59 (0.94)

• all variables are stationary after 1st difference

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Estimation Results Panel Coint.Test
Kao (1999) Residual Cointegration Tests
Null hypothesis No Cointegration Statistics Probability
Panel of All Countries -3.15 0.00
Net Oil Exporting Countries -1.28 0.09
Net Oil Importing Countries -2.88 0.00
Evidence of cointegration is found in the data
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Estimation Results Panel Coint.Test
Maddala Wu (1999) Panel Coint. Test for Panel
of All Countries
Hypothesized No. of CE(s) (from trace test) Prob. (from max-eigen test) Prob.
None 38.93 0.00 41.23 0.00
At most 1 12.12 0.74 12.09 0.74
Evidence of cointegration is found in the data
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Estimation Results PMG Estimator
Panel of 8 Countries
Dependent Var Log Real Exch. Rate Without Time Trend. One lag (1,1,1) Without Time Trend. One lag (1,1,1) Without Time Trend. One lag (1,1,1) Without Time Trend. One lag (1,1,1) With Time Trend. One lag (1,1,1) With Time Trend. One lag (1,1,1) With Time Trend. One lag (1,1,1) With Time Trend. One lag (1,1,1)
Dependent Var Log Real Exch. Rate MG PMG Hausman DFE MG PMG Hausman DFE
Convergence Coeff -0.02 -0.01 -0.01 -0.02 -0.01 -0.01
Long Run Coeff.
Log Oil Price 0.04 0.18 0.00 0.04 0.05 0.21 0.00 0.05
Int.Rate Diff. -1.59 -5.41 -0.30 -1.70 -4.95 -0.38
Positive relationship oil price increase leads
to exc. rate depreciation
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Summary and Conclusion

• The paper finds evidence of positive relationship
  between oil price exchange rate among oil
  importing countries i.e. increase in oil price
  exch. rate depreciation (weakening of
  currency)

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Summary and Conclusion

• However, no evidence of negative oil price
  exchange rate relationship is found for oil
  exporting countries i.e oil price increase leads
  to exchange rate appreciation
• Perhaps the lack of evidence for oil exporting
  countries is due to selection of countries in the
  sample

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Summary and Conclusion

• Mainly, the oil exporting countries are not main
  OPEC countries where oil account for major export
  contribution
• Interest rate differential is negatively
  significant for all country groupings.

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