BOFIT Discussion Papers, Institute for Economies in Transition, Bank of Finland
No 8/2007:
Equilibrium exchange rates in oil-dependent countries
Iikka Korhonen ()
and Tuuli Juurikkala ()
Abstract: We assess the determinants of equilibrium real exchange
rates in a sample of oil-dependent countries. Our basic data cover OPEC
countries from 1975 to 2005. We also include three oil-producing
Commonwealth of Independent States (CIS) countries in our robustness
analysis. Utilising several estimation techniques, including pooled mean
group and mean group estimators, we find that the price of oil has a clear,
statistically significant effect on real exchange rates in our group of
oil-producing countries. Higher oil price lead to appreciation of the real
exchange rate. Elasticity of the real exchange rate with respect to the oil
price is typically between 0.4 and 0.5, but may be larger depending on the
specification. Real per capita GDP, on the other hand, does not appear to
have a clear effect on real exchange rate. This latter result contrasts
starkly with the consensus view of real exchange rates determinants,
emphasising the unique position of oil-dependent countries.
Keywords: equilibrium exchange rate; pooled mean group estimator; resource dependency; (follow links to similar papers)
JEL-Codes: F31; F41; P24; Q43; (follow links to similar papers)
24 pages, April 20, 2007
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