Chapter 6 Oil Prices and Exchange Rates: Some New Evidence Using Linear and Nonlinear Models

Purpose – The purpose of this chapter is to investigate the linear and nonlinear short- and long-run relationships between the real price of oil and the US real effective exchange rate. Methodology/approach – We use recent linear and nonlinear econometric techniques over the period 1973–2009. Findings – Our main findings are that (i) there is significant evidence that both variables contain a unit root; (ii) the oil price and the US exchange rate are strongly linked in the short run; and finally (iii) there are some signs of nonlinearity in the oil–exchange rate relationship. Originality – Using recent econometric techniques, we show that exchange rates are not a fundamental determinant of oil prices but exchange rate changes help to better forecast oil prices in the short run.