Estimation of Causal Relationship between Oil Prices and Exchange Rates

Although a large number of theoretical and empirical studies have made efforts to determine the causal relationship between oil price and the exchange rate, there is no clear academic consensus on the relationship of these variables. The objective of this research is to determine the causal relationship between oil price and exchange rate for sixteen main oil exporting and importing countries around the world. For this effect, the Granger causality methodology and the Time-Varying Parameter Vector Autogression (TVP - VAR) model that allows to capture structural breack or non-linearities effects are used. The study sample includes six variables for each country and covers a period that begins from January 1994 to March 2021. According to the results, it is observed that the causal relationship that goes from oil prices to the exchange rate is more significant, especially in the short term, while the effect of the exchange rate on oil prices is weakly significant. On the other hand, according to the results of the TVP-VAR, the causal relationship between oil price and the exchange rate is not as direct as many authors of other studies point out, there are elements through which can even minimize this relationship, therefore, the causal relationship is not a simple relationship of sympathy, but will depend on many external and internal factors, as well as the exchange rate policies applied in each country.