Asymmetric Effects of Oil Price Shocks on Eur/Usd Exchange Rate in a Bvar Model with Sign Restriction

We use a VAR model with two exogenous and eight endogenous variables to evaluate the asymmetric effect of oil price changes on the EUR/USD exchange rate. Parameters of the model are estimated with the Bayesian technique using quarterly data for the U.S. and the Eurozone from 2001 to 2021. To obtain the structural form of the VAR model from its reduced form, the sign restriction methodology is employed. The results show a significant asymmetric impact of oil price changes on EUR/USD exchange rate. A positive oil price shock causes dollar depreciation which is smaller than the dollar appreciation when oil prices decrease. We use four metrics to show that: first, the oil price effect on EUR/USD exchange rate is highly timevariant; second, oil price volatility on average is responsible for about half of exogenous shocks; third, exogenous shocks on average account for about one-third of the deterministic part of the model; and four, the model explains about two-thirds of the EUR/USD exchange rate volatility. Not only can the structural shock decomposition quantify the effect of each individual shock, it also can detect correlation relationship between the structural shocks of other endogenous variables with EUR/USD exchange rate volatility over a longer subperiod when the economy is exposed to external extraordinary events