The Effect of Oil Prices on Floating Exchange Rates

Abstract: This thesis contributes to the existing literature by examining the effect of oil prices on floating exchange rates of oil dependent countries. I conduct empirical tests on monthly data of 32 currencies over a timeframe of 15 years from 2003 to 2017 and 13 currencies over a timeframe of 25 years from 1993 to 2017. The analysis, therefore, includes a large sample that has the drawback of a shorter sample, and a longer sample with fewer currencies which has not been the focus of previous research. Data is estimated using the VECM as some variables are co-integrated. Empirical results show that in the shorter sample, exchange rates are affected by the price of oil a third of the sample, while the short-term interest rate affects exchange rates in 37.5% of the sample. In the long-run, there is evidence of a relationship between oil prices and exchange rates in only 10% of the sample. In the longer sample, results indicate that oil prices have a direct effect on exchange rates in more than 50% of the sample in the short-run, while interest rates have no effect. And in the long-run, only 15% of the models show a long-run relationship with the price of oil.