1 MUKHRIZ IZRAF AZMAN AZIZ Lancaster University ESDS International Annual Conference th November 2009 Institute of Materials, London

The paper is about : Oil price fluctuations & its relationship with exchange rates The instability in the oil market in recent years affect many sectors in the economy 2

Evidence to link oil price fluctuations to changes in GDP [Hamilton (1986); Burbidge and Harrison (1984) and Rotenberg and Woodford (1996)] 3

Less attention has been paid to the relationship between exchange rates and oil price fluctuations The recent surge in oil prices till mid was followed by depreciation in the US dollar and other major currencies. 4

The potential significance of the price of oil for exchange rate movements has been noted by, inter alia (Golub, 1983, Krugman, 1983) Evidence of long run relationship between oil price & exchange rate - Lee and Ni (1995), Hooker (1996) 5

Introduction Impacts of oil price fluctuations differ between oil importing and oil exporting countries Oil price increase may lead to exchange rate appreciation in oil exporting countries ( Korhonen and Juurikkala, 2009) For oil importing countries, oil price increase may lead to exchange rate depreciation ( Chen and Chen, 2007) 6

To empirically estimate the impacts of oil price fluctuations on exchange rate between oil importing and oil exporting countries To determine if the impacts oil price fluctuations differ between these two groups of countries 7

q it = α i + β 1i drr it + β 2i roil t where q it is real exchange rate where drr it is real int. rate diff where roil t is real oil price in US dollar 8 Model to Estimate

The paper uses 8 countries consisting of 5 net oil importing countries and 3 net oil exporting countries Data is monthly panel data from 1980:1 to 2008:11. 9

Method and Data To estimate the long run impacts of oil price shocks on real exchange rate, the paper employs Pesaran (1999) Pooled Mean Group Estimator (PMG) Uses another two estimators for robustness check : MG and DFE 10

Method and Data Estimation procedures involve 3 steps: 1 st - Perform panel unit root test – testing for stationarity of the data Not a normal practice in econometric using panel data But is necessary in this paper because of time series nature of data 11

Method and Data Estimation procedures involve 3 steps: 2 nd -Testing for panel cointegration – determine if long run relationship exist 3 rd -Estimating long run relationship using(PMG) 12

Series in Level Null Hyp. Exc. RateOil PriceInt. Rate. Dif Levin, Lin and Chu Unit Root-0.46 (0.32)1.15 (0.87)2.89 (0.99) Breitung t-statUnit Root0.17 (0.57)3.33 (0.99)-2.43 (0.00) Im, Pesaran & Shin Unit Root0.00 (0.50)2.17 (0.98)-1.95 (0.02) ADF-FisherUnit Root11.86 (0.75)3.01 (0.99)24.40(0.08) Hadri Z-statStationary10.05 (0.00)29.24 (0.00)4.86 (0.00) 13 Panel Unit Root Tests for Panel of All Countries All variables are non-stationary at levels

Series in 1 st Diff Null Hyp. Exc. RateOil PriceInt. Rate. Dif Levin, Lin and Chu Unit Root (0.00)-52.51(0.00) (0.00) Breitung t-statUnit Root 1.55 (0.93)-9.71 (0.00) (0.00) Im, Pesaran & Shin Unit Root (0.00) (0.00) (0.00) ADF-FisherUnit Root (0.00) (0.00) (0.00) Hadri Z-statStationary 0.07 (0.47)-2.34 (0.99)-1.59 (0.94) 14 Panel Unit Root Tests for Panel of All Countries all variables are stationary after 1 st difference

Null hypothesis: No Cointegration StatisticsProbability Panel of All Countries * Net Oil Exporting Countries * Net Oil Importing Countries * 15 Kao (1999) Residual Cointegration Tests *Evidence of cointegration is found in the data

16 Hypothesized No. of CE(s) (from trace test) Prob. (from max- eigen test) Prob. None * * At most Maddala & Wu (1999) Panel Coint. Test for Panel of All Countries *Evidence of cointegration is found in the data

Dependent Var: Log Real Exch. Rate Without Time Trend. One lag (1,1,1)With Time Trend. One lag (1,1,1) MGPMGHausmanDFEMGPMGHausmanDFE Convergence Coeff -0.02*-0.01* -0.02*-0.01* Long Run Coeff. Log Oil Price * * Int.Rate Diff * * Panel of 8 Countries Positive relationship : oil price increase leads to exc. rate depreciation

The paper finds evidence of positive relationship between oil price & exchange rate among oil importing countries ; i.e. increase in oil price exch. rate depreciation (weakening of currency) 18

However, no evidence of negative oil price – exchange rate relationship is found for oil exporting countries: i.e oil price increase leads to exchange rate appreciation Perhaps the lack of evidence for oil exporting countries is due to selection of countries in the sample 19

Mainly, the oil exporting countries are not main OPEC countries where oil account for major export contribution Interest rate differential is negatively significant for all country groupings. 20

21 THANK YOU