Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 810: Oil Prices and Real Exchange Rate Movements in Oil-Exporting Countries: The Role of Institutions

Johanna Rickne ()
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Johanna Rickne: Research Institute of Industrial Economics (IFN), Postal: P.O. Box 55665, SE-102 15 Stockholm, Sweden, and Uppsala University, Department of Economics, Uppsala, Sweden

Abstract: Political and legal institutions affect the extent to which the real exchange rates of oil-exporting countries co-move with the oil price. In a simple theoretical model, strong institutions insulate real exchange rates from oil price volatility by generating a smooth pattern of fiscal spending over the price cycle. Empirical tests on a panel of 33 oil-exporting countries provide evidence that countries with high bureaucratic quality and strong and impartial legal systems have real exchange rates that co-move less with the oil price.

Keywords: Real Exchange Rate; Commodity Price; Institutions; Development

JEL-codes: F31; H11; Q48

31 pages, First version: September 23, 2009. Revised: October 15, 2010.

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