Oil Prices and Exchange Rates in Brazil, India and Turkey: Time and Frequency Domain Causality Analysis

Year 2013, Volume: 1 Issue: 1, 49 - 73, 01.01.2013

Uğur Adıgüzel Tayfur Bayat Selim Kayhan Şaban Nazlıoğlu

Abstract

This study investigates causal dynamics between crude oil prices and exchange rates in Brazil, India and Turkey by employing monthly data from the beginning of floating exchange regime to July 2011. The study benefits from the recent developments in the time series econometric analysis and carries out time domain causality tests linear causality, non-linear causality, volatility spillover and frequency domain causality test. Findings show that results from frequency domain causality test are slightly different from than those from time domain causality methods. The frequency domain analysis provides evidence on bi-directional causality in India and uni-directional causality from real exchange rates to real oil price in Turkey and Brazil

Keywords

Oil Prices, Exchange Rates, Frequency Domain Causality Analysis

Brezilya, Hindistan ve Türkiye’de Petrol Fiyatları ve Döviz Kuru: Zaman ve Frekans Dağılımı Nedensellik Analizleri

Abstract

Bu çalışma, esnek döviz kuru rejiminin başlamasından Temmuz 2011 dönemine ait aylık verileri kullanarak Brezilya, Hindistan ve Türkiye’de ham petrol fiyatları ile döviz kurları arasındaki nedensellik dinamiklerini irdelemektedir. Bu çalışma zaman serisi ekonometrisindeki yeni gelişmelerden faydalanmakta ve zaman dağılımı nedensellik testleri lineer nedensellik, doğrusal olmayan nedensellik, oynaklık taşma ile frekans dağılımı nedensellik testi uygulamaktadır. Frekans dağılımı nedensellik testi sonuçlarının zaman dağılımı nedensellik testleri sonuçlarından farklılaştığı görülmektedir. Frekans dağılımı analizine göre, Hindistan için değişkenler arasında çift yönlü nedensellik bulunurken Türkiye ve Brezilya için reel döviz kurundan petrol fiyatlarına tek yönlü nedensellik bulunmaktadır.

Keywords

Petrol fiyatları, Döviz Kuru, Frekans Dağılımı Nedensellik Analizi

References

• Akram, Q.F., (2004), “Oil Prices and Exchange Rates: Norwegian Evidence”, Econometrics Journa, 7, p. 476-504.
• Aleisa, E.A., Dibooglu, S., (2002), “Sources of Real Exchange Rate Movements in Saudi Arabia”, Journal of Economics and Finance, 26 (1), p. 101-110.
• Amano, R.A., van Norden, S., (1998), “Oil Prices and the Rise and Fall of the US Real Exchange Rate”, Journal of International Money and Finance, 17, p. 299-316.
• Baek, E., Brock, W. A., (1992), “General Test for Nonlinear Granger Causality: Bivariate Model”, Iowa State University and University of Wisconsin-Madison Working Paper.
• Bagella, M., Becchetti, L., Hasan, I., (2006), “Real Effective Exchange Rate Volatility and Growth: A Framework to Measure Advantages of Flexibility vs. Costs of Volatility”. Journal of Banking and Finance, 30, p. 1149-1169.
• Basher, S., Haug, A.A., Sadorsky, P., (2011), “Oil Prices, Exchange Rate and Emerging Stock Markets”, http://ssrn.com/abstract=1852828.
• Bekiros, S.D., Diks, C.G.H., (2008), “The Relationship between Crude Oil Spot and Futures Prices: Cointegration, Linear and Nonlinear Causality, Energy Economics, 30, p. 2673-2685.
• Benassy-Quere, A., Mignon, V., Alexis, P., (2007), “China and the Relationship between the Oil Price and the Dollar”, Energy Policy. 35, p. 5795-5805.
• Bergstrand, J.H., (1991), “Structural Determinants of Real Exchange Rates and National Price Levels: Some Empirical Evidence, American Economic Review. 81 (1), p. 325-334.
• Bogdanski, J., Tombini, A.A., Werlang, S.R.C., (2000), “Implementing Inflation Targeting In Brazil. Banco Central Do Brasil”, Working Paper Series no. 1/ 2000.
• Branson, W.H., (1981), “Macroeconomic Determinants of Real Exchange Rates”. NBER Working Paper. no. 801.
• Breitung, J., Candelon, B., (2006), “Testing For Short and Long-Run Causality: A Frequency Domain Approach”, Journal of Econometrics. 12, p. 363−378.
• Carbajo, D.M., (2011), “Energy Dependence, Oil Prices and Exchange Rates: The Dominican Economy Since 1990”. Empirical Economics. 40, p. 509-520.
• Chadhuri, K., Daniel, B.C., (1998), “Long-Run Equilibrium Real Exchange Rates and Oil Prices”, Economic Letters. 58, p. 231-238.
• Chen, S.S., Chen, H.C., (2007), “Oil Prices and Real Exchange Rates”. Energy Economics. 29, p. 390-404.
• Cheung, Y.W., Ng, L.K., (1996), “A Causality In Variance Test and Its Application to Financial Market Prices”, Journal of Econometrics. 72, p. 33-48.
• Chinn, M.D., (2006), Real exchange rates, National Bureau of Economic Research Publication.
• Ciner, C., (2011), “Eurocurrency Interest Rate Linkages: A Frequency Domain Analysis”, International Review of Economics and Finance. 20, p. 498-505.
• Clarida, R., Gali, J., (1994), “Sources of Real Exchange Rate Fluctuations: How Conference Series on Public Policy. 41 (1), p. 1-56.
• Coudert, V., Mignon, V., Penot, A., (2008), “Oil Price and The Dollar”, Energy Studies Review. 15 (2), p. 1-20.
• Dawson, J.C., (2003), “The Effect Of Oil Prices On Exchange Rates: A Case Study Of The Dominician Republic”, The Park Place Economist. 14, p. 23-30.
• De Paula, L. F., (2007), “Financial Liberalisation, Exchange Regime and Economic Performance in Brics Countries”, Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] no. 016.
• Dickey, D.A., Fuller, W.A., (1979), “Distribution of the Estimators for Autoregressive Time Series With A Unit Root”, Journal of the American Statistical Society. 75, p. 427-431.
• Dickey, D.A., Fuller, W.A., (1981), “Distribution of the Estimators for Autoregressive Time Series With A Unit Root”, Econometrica. 49, p. 1057-1072.
• Diks, C.G.H., Panchenko, V., (2005), “A Note On The Hiemstra-Jones Test for Granger Non-Causality”, Studies in Nonlinear Dynamics and Econometrics. 9 (2), p. 1-7.
• Diks, C.G.H., Panchenko, V., (2006) “A New Statistic and Practical Guidelines for Nonparametric Granger Causality Testing”, Journal of Economic Dynamics and Control, 30, p. 1647-1669.
• Dornbusch, R., (1980) “Exchange Rate Economics: Where Do We Stand?” Brookings Papers on Economic Activity II, 1, p. 143-186.
• Dua, P., Ranjan, R., (2010), “Exchange Rate Policy and Modeling In India”, Reserve Bank of Mumbai Department of Economic Analysis and Policy, Development Research Study, no. 33.
• Efron, B., (1979), Bootstrap Methods: Another Look At The Jackknife, Annuals of Stats, 7, p. 1-26.
• Elliot, G., Rothenberg, T.J., Stock, J.H., (1996), “Efficient Tests for an Autoregressive Unit Root”, Econometrica. 64 (4), p. 813-836.
• Enders, W., Dibooglu, S., (2001), “Long-Run Purchasing Power Parity with Asymmetric Adjustment”, Southern Economic Journal, 68, p. 533- 445.
• Faruqee, H., (1995), “Long-Run Determinants of the Real Exchange Rate: A Stock-Flow Perspective”, International Money Fund Staff Papers, 42 (1), p. 80-107.
• Fichera, J., Kueter, J., (2006), “Considering Brazil’s Energy Independence”, The Marshall Institute Policy Outlook Series, September 2006.
• Geweke, J., (1982), “Measurement of Linear Dependence and Feedback Between Multiple Time Series”, Journal of the American Statistical Association. 77, 304-313.
• Goldman Sachs, (2003), “Dreaming with BRICs: The Path to 2050”, Global Econ. Paper, no: 99.
• Golub, S.S., (1983), “Oil Prices and Exchange Rates”. The Economic Journal, 93, p. 576-593.
• Granger, C.W.J., (1969), “Investigating Causal Relations by Econometric Models and Cross-Spectral Methods”, Econometrica. 37, p. 424-438.
• Habib, M.M., Kalamova, M.M., (2007), “Are there Oil Currencies? The Real Exchange Rate of Oil Exporting Countries”, European Central Bank Working Paper Series, no: 839.
• Hacker R. S. and Hatemi-J, A., (2006), “Tests for Causality Between Integrated Distributions: Theory and Application”, Applied Economics. 38 (13), p. 1489-1500 Based on Asymptotic and Bootstrap
• Hafner, C.M., Herwartz, H., (2006), “A Lagrange Multiplier Test for Causality in Variance”, Economics Letters, 93, p. 137-141.
• Hasanov, F., (2010), “The Impact of Real Oil Price on Real Effecive Exchange Rate: The Case of Azerbaijan”. German Institute for Economic Research Discussion Paper, no: 1041.
• Hiemstra C, Jones J.D., (1994), “Testing for Linear and Nonlinear Granger Causality in The Stock Price-Volume Relation”. The Journal of Finance, 49 (5), p. 1639-1664.
• Hong, Y. (2001), “A Test for Volatility Spillover With Application to Exchange Rates”, Journal of Econometrics, 103, p. 183-224.
• Hosoya, Y., (1991), The Decomposition and Measurement of The Interdependence Probability Theory and Related Fields. 88, p. 429-444. Second-Order Stationary Process
• Huang, Y., Guo, F., (2007), “The Role of Oil Price Shocks on China’s Real Exchange Rate”, China Economic Review, 18, p. 403-416.
• Huang, A.Y., Tseng, Y.H., (2010), “Is Crude Oil Price Affected By The US Dollar Exchange Rate?” International Research Journal of Finance and Economics, 58, p. 109-120.
• Indjehagopian, J.P., Lantz, F., Simon, V., (2000), “Dynamics of Heating Oil Market Prices in Europea”, Energy Economics, 22, p. 225-252.
• Issa, R., Lafrance, R., Murray, J., (2006), “The Turning Back Tide: Energy Prices and The Canadian Dollar”, Bank of Canada Working Paper, no: 2006-29.
• Jahan-Parvar, M.R., Mohammadi, H., (2008), Oil Prices and Real Exchange Rates in Oil-Exporting Countries: A Bounds Testing Approach, University Library of Munich, no: 13435.
• Kipici, A.N., Kesriyeli, M., (1997), The Real Exchange Rate Definitions and Calculations, Central Bank of the Republic of Turkey Research Department, Publication no: 97/1.
• Korhonen, I., Juurikkala, T., (2009), “Equilibrium Exchange Rates in Oil Exporting Countries”, Journal of Economisc and Finance, 33, p. 71- 79.
• Krugman, P., (1983a), “Oil and The Dollar”, NBER Working Paper Series. No: 554.
• Krugman, P., (1983b), “Oil shocks and exchange rate dynamics” (Jacob. A. Frenkel ed.), Exchange Rates and International Macroeconomics, University of Chicago Press.
• Kutan, A.M., Wyzan, M.L., (2005) “Explaining the Real Exchange Rate in Kazakhstan, 1996-2003: Is Kazakhstan Vulnerable to the Dutch Disease?” Economic Systems. 29, p. 242-255.
• Kwiatkowski, D., Phillips, P.C.B., Schmidt, P., Shin, Y., (1992), “Testing The Null Hypothesis of Stationary Against The Alternative of A Unit Root”, Journal of Econometrics, 54, p. 159-178.
• Lainela, S., Ponomarenko, A., (2012), Russian Financial Markets and Monetary Policy Instruments, Bank of Finland, BOFIT, no:3.
• Lizardo, R.A., Mollick, A.V., (2010), “Oil Price Fluctuations and the U.S. Dollar Exchange Rates”, Energy Economics, 32, p. 399-408.
• Lütkepohl, H., (2004), “Vector Autoregressive and Vector Error Correction Models”, in: Lütkepohl, H., Kratzi, M. (Eds.), In Applied Time Series Econometrics, Cambridge University Press, Cambridge.
• Mark, N.C., Choi, D.Y., (1997), “Real Exchange Rate Prediction Over Long Horizons”, Journal of International Economics, 43 (1-2), p. 29-60.
• Mohammadi, H., Jahan-Parvar, M.R., (2010), “Oil Prices and Exchange Rates in Oil-Exporting Countries: Evidence from TAR and M-TAR Models”, Journal of Economics and Finance. 23, p. 1-14.
• Narayan, P.K., Narayan, S., Prasad, A., (2008), “Understanding the Oil Price-Exchange Rate Nexus for the Fiji Islands”, Energy Economics, 30, p. 2686-2696.
• Nazlioglu, S. (in press), Exchange Rate Volatility and Turkish Industry-Level Export: Panel Cointegration Analysis. The Journal of International Trade & Economic Development: An International and Comparative Review, doi:10.1080/09638199.2012.660978
• Nikbakht, L., (2010), “Oil Prices and Exchange Rates: The Case Of OPEC”, Business Intelligence Journal, 3 (1), p. 83-92.
• Olomola, P.A., Adejumo, A.V., (2006), “Oil Price Shocks and Macroeconomic Activities Innigeria”, International Research Journal of Finance and Economics. 3, p. 28-34.
• Onder, Y., (2007), Dalgalanma Korkusu ve Turkiye, Uzmanlik Yeterlilik Tezi, TCMB.
• Oomes, N., Kalcheva, K., (2007), “Diagnosing Dutch Disease: Does Russia Have the Symptoms?”, BOFIT Discussion Papers, no: 7.
• Phillips, P.C.B., Perron, P., (1988), “Testing for A Unit Root in Time Series Regressions”, Biometrica, 75, p. 335–346.
• PindyckR.S., Rotemberg, J.J., (1990), “The Excess Co-Movement of Commodity Prices”, The Economic Journal, 100, p. 1173-1189.
• People’s Bank of China, (2006), China Monetary Policy Report, Quarter Four, Publication of Monetary Analysis Group of the People’s Bank of China.
• Rickne, J., (2009), “Oil Prices and Real Exchange Rate Movements in Oil- Exporting Countries: The Role of Institutions”, Research Institute of Industrial Economics Working Paper Series, no: 810.
• Sadorsky, P., (2000), “The Empirical Relationship between Energy Futures Prices and Exchange Rates”, Energy Economics 22, p. 253-266.
• Sari, R., Shawkat, H., Soytas, U., (2010), “Dynamics of Oil Price, Precious Metal Prices, and Exchange Rate”, Energy Economics, 32 (2), p. 351- 362.
• Schmidbauer, H., Rösch, A., (2008), Volatility Spillovers between Crude Oil Prices and US Dollar to Euro Exchange Rates, Unpublished Research Paper.
• Serven, L., Solimano, A., (1993), “Debt Crisis, Adjustment Policies and Capital Formation in Developing Countries: Where Do We Stand?”, World Development, 21, p. 127-140.
• Spatafora, N., Stavrev, E., (2003), “The Equilibrium Real Exchange Rate in A Commodity Exporting Country: The Case of Russia”. IMF Working Paper, no: WP/03/93.
• Al-Mulali, U., Che Sab, N., (2009), The Impact of Oil Prices on The Real Exchange Rate of The Dirham: A Case Study of The United Arab Emirates, University Library of Munich, no: 23493.
• Toda, H.Y.,Yamamoto, T., (1995), “Statistical Inference in Vector Autoregression with Possibly Integrated Processes”, Journal of Econometrics, 66, p. 225-250.
• Turkish Petroleum Corporation, (2011), “2010 Yılı Ham Petrol ve Doğalgaz Sektör Raporu”, August.
• World Energy Outlook, (2007), China and India Insights, International Energy Agency Publication.
• Wu, C.C., Chung, H., Chang, Y.H., (2012), “The Economic Value of Co- Movement between Oil Price and Exchange Rate Using Copula-Based GARCH Models”, Energy Economics, 34 (1), p. 270-282.
• Yanagisawa, A., (2010), Relationship among Crude Oil Prices, Share Prices and Exchange Rate, IEEJ, November Issue.
• Yousefi, A., Wirjanto, T.S., (2004) “The Empirical Role of The Exchange Rate on The Crude Oil Price Formation”, Energy Economics, 26, p. 783-799.
• Yousefi, A., Wirjanto, T.S., (2005), “A Stylized Exchange Rate Pass- Through Model of Crude Oil Price Formation”, OPEC Review, September Issue, p. 177-197.
• Zalduendo, J., (2006), “Determinants of Venezuela’s Equilibrium Real Exchange Rate”, IMF Working Paper, no: WP/06/74.
• Zhang, Y.J., Fan, Y., Tsai, H.T., Y.M., (2008), “Spillover Effect of US Dollar Exchange Rate on Oil Prices”, Journal of Policy Modeling, 30, p. 973-991.