CEPII, Recherche et Expertise sur l'economie mondiale
On the Impact of Oil Price Volatility on the Real Exchange Rate - Terms of Trade Nexus : Revisiting Commodity Currencies


Virginie Coudert
Cécile Couharde
Valérie Mignon

 Highlights :
  • We investigate the relationship between terms of trade and real exchange rates for a panel of 69 commodityproducing countries over the 1980-2012 period.
  • We show that the terms of trade - real exchange rates nexus is nonlinear and depends on the volatility on the oil market.
  • Exchange rates are mainly driven by fundamentals in the low-volatility regime, and are mostly sensitive to changes in terms of trade when oil price variations exceed a certain threshold.

 Résumé :
The aim of this paper is to study the relationship between terms of trade and real exchange rates of commodityproducing Commodity currencies,countries on both the short and the long run. We pay particular attention to the dominant role played by oil among commodities by investigating the potential non-linear effect exerted by the situation on the oil market on the real exchange rate - terms of trade nexus. To this end, we rely on the panel smooth transition regression methodology to estimate the adjustment process of the real effective exchange rate to its equilibrium value depending on the volatility on the oil market. Considering a panel of 52 commodity exporters and 17 oil exporters over the 1980-2012 period, our findings show that while exchange rates are mainly driven by fundamentals in the low-volatility regime, they are mostly sensitive to changes in terms of trade when oil price variations exceed a certain threshold. The commodity-currency property is thus at play in the short run only for important variations in the oil price.

 Mots-clés : Commodity currencies | Oil price | Non-linearity

 JEL : C23, F31, Q43
CEPII Working Paper
N°2013-40, December 2013

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