Oil prices, exchange rates and interest rates
- There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of traditional oil demand and oil supply shocks from the effects of exogenous variation in the U.S. real interest rate and in the real value of the U.S. dollar. Our approach exploits a combination of sign and zero restrictions and narrative restrictions motivated by economic theory and extraneous evidence. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between these variables.
Author: | Lutz KilianGND, Xiaoqing Zhou |
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URN: | urn:nbn:de:hebis:30:3-558268 |
URL: | https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3731015 |
Parent Title (English): | Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 646 |
Series (Serial Number): | CFS working paper series (646) |
Publisher: | Center for Financial Studies |
Place of publication: | Frankfurt, M. |
Document Type: | Working Paper |
Language: | English |
Year of Completion: | 2020 |
Year of first Publication: | 2020 |
Publishing Institution: | Universitätsbibliothek Johann Christian Senckenberg |
Release Date: | 2020/12/08 |
Tag: | commodity; exchange rate; global real activity; market rate of interest; oil price |
Issue: | November 13, 2020 |
Page Number: | 46 |
HeBIS-PPN: | 47440014X |
Institutes: | Wirtschaftswissenschaften / Wirtschaftswissenschaften |
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS) | |
Dewey Decimal Classification: | 3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft |
Sammlungen: | Universitätspublikationen |
Licence (German): | ![]() |