Working Paper: CEPR ID: DP8635
Authors: Domenico Ferraro; Kenneth Rogoff; Barbara Rossi
Abstract: This paper investigates whether oil prices have a reliable and stable out-of-sample relationship with the Canadian/U.S dollar nominal exchange rate. Despite state-of-the-art methodologies, we find little systematic relation between oil prices and the exchange rate at the monthly and quarterly frequencies. In contrast, the main contribution is to show the existence of a very short-term relationship at the daily frequency, which is rather robust and holds no matter whether we use contemporaneous (realized) or lagged oil prices in our regression. However, in the latter case the predictive ability is ephemeral, mostly appearing after instabilities have been appropriately taken intoaccount.
Keywords: exchange rates
JEL Codes: C22; C53; F31; F37
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| contemporaneous realized oil prices (Q31) | Canadian-US dollar nominal exchange rate (F31) |
| lagged oil prices (Q47) | Canadian-US dollar nominal exchange rate (F31) |
| oil price changes (Q31) | exchange rate fluctuations (F31) |
| oil prices (L71) | forecasting information for exchange rates (F37) |
| oil prices (L71) | exchange rates for other currencies (F31) |