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Keywords
Oil price, exchange rate, oil-exporting countries, oil-importing countries
Abstract
This study investigates the impact of oil price on the exchange rate by incorporating the economic indicators (Inflation, Money supply, and Net trade), financial indicators (Interest rate and Stock market index) and US factor (Implied volatility index), the researcher attempts to identify the relationship among these variables on the exchange rate. The Ordinary least square method was performed to meet the purpose of this study by using the monthly time series data technique for the period August 2005 to December 2016 and the sample countries are selected from oil-exporting (Russia, Canada, and Malaysia) and oil-importing countries (China, India, and Japan). The findings reveal that an increase in oil price oil-exporting countries (Russia, China, and Malaysia) currency will appreciate and oil-importing (China and India) countries will also appreciate except Japan currency. The evidence from China and India portray a theory that developed by Krugman (1983) and Golub (1983) where an increase in the oil price oil-importing countries experience appreciation in the exchange rate and vice versa due to wealth transfer. Thus, in order to formulate and implementing economic policies the government should consider the impact of oil price specially the exchange rate policies since the impact is significant.
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Introduction
Oil price is subjected to change by several factors and lead the world economy to move in different direction for both oil-importing and oil-exporting countries. It is also can lead to a domino effect on macroeconomics and financial variables, especially on the exchange rate fluctuation. The empirical evidence stated that as an increase in the oil price would affect the economic and financial condition to change in many ways. Basically, any changes (increase) in oil price would affect the country's wealth through the trade channel by transferring the wealth from oil importing to the exporting countries. Hence, the exchange rate would fluctuate as the oil prices increase or decrease (Tuhan et al, 2013). Generally, research on oil price has been found a mixed result with regards to its different effect on the exchange rate movement experienced in both oil importers and exporters countries (Zalduendo, 2006; Kutan and Wyzan, 2005; Koranchelian, 2005; Spatafora and Stavrev, 2003; Lizardo and Mollick, 2010; Akram, 2004;...