Economic Interdependence and Flexible Exchange Rates

Oil prices, news-based uncertainty measures and exchange rate returns in BRICS countries

“…The global events during these horizons align to the subprime crisis in 2007, AFC in mid-1990s, GFC 2008-2010 and European debt crisis. Indeed, the out-of-phase and the leading position of oil prices confirm the theoretical prediction that for an oil-importing economy of India, the Rupee tends to depreciate given oil price increases and deteriorating trade balance (Rogoff 1991;Krugman, 1983). Meanwhile, in China, while there are small areas of correlation between oil price and Renminbi-US$ exchange rate returns, we do not observe phase difference and interdependency between the series across the investment horizons except where the Renminbi leads oil prices at the 2-8-month scale starting from the beginning of the sample period from 1986 to 1987.…”

“…The theoretical channel of oil price transmission to exchange rate is established (Hamilton, 1983;Krugman, 1983;Golub, 1983;Rogoff, 1991;B enassy-Qu er e et al, 2007). Following the theoretical channels of the inherent oil price exchange rate dynamics pioneered by Golub (1983), Krugman (1983) and Rogoff (1991), the terms of trade and wealth channels are explicit. The reactions of net oil-importing and -exporting economies can differ based on the terms of trade channel (B enassy-Qu er e et al, 2007).…”

“…While oil price increases deteriorate trade balance and deplete local currency exchange rate value in oil-importing countries, terms-of-trade shocks can stimulate non-tradable goods and spur exchange rate appreciation in oil-exporting countries (B enassy-Qu er e et al, 2007;Basher et al, 2015). Through the wealth/portfolio channel, there is a transfer of wealth to oil-exporting economies when there is an increase in oil price; this reflects in current account balance growth and currency appreciation (Golub, 1983 andKrugman, 1983). The opposite theoretically holds for oil importers.…”

“…The theoretical linkage between oil prices and the exchange rate is well established (Krugman, 1983;Golub, 1983;Rogoff, 1991;B enassy-Qu er e et al, 2007) particularly because oil price is denominated in the US dollar. Following the pioneer works of Hamilton (1983), recent literature has studied the inherent dynamics and the predictive power of commodity-price in particular oil prices on the behavior of exchange rates (Huang et al, 2020;Salisu et al, 2020;Devpura, 2021;.…”

“…Further, the theoretical position on the possible transmission channels through which oil price movement interacts with exchange rate (Krugman, 1983;Rogoff, 1991;B enassy-Qu er e et al, 2007) is explicit. As such, the inherent oil demand and supply shocks amidst uncertainty may impact the economy at different time scales.…”