Estimation of Causal Relationship between Oil Prices and Exchange Rates

Student: Belov Artem

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Applied Economics and Mathematical Methods (Master)

Year of Graduation: 2024

In this study, we investigate the relationship between oil prices and exchange rates. By adding oil prices to the classical monetary model with flexible prices we establish the dependence of the US dollar exchange rate on oil price shocks. As a result of the study, we reach the following conclusions: 1) When real oil prices increase, the US dollar exchange rate depreciates significantly against the currencies of oil-exporting countries. 2) A strong cointegration relationship between exchange rate, money demand and real income is found. 3) Significant purchases of oil by the U.S. cause an increase in the supply of U.S. dollars in foreign exchange markets relative to the currencies of the of net oil exporters, which leads to a decrease in the value of the US dollar. Translated with DeepL.com (free version)

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