Oil Prices, Exchange Rates and Interest Rates
By Lutz Kilian, Xiaoqing Zhou. Social Science Research Network, 2019
114 citations recorded by the source corpus.
There has been much interest in the relationship between the price of crude oil, the value of the U.S. dollar, and the U.S. interest rate since the 1980s. For example, the sustained surge in the real price of oil in the 2000s is often attributed to the declining real value of the U.S. dollar as well as low U.S. real interest rates, along with a surge in global real economic activity. Quantifying these effects one at a time is difficult not only because of the close relationship between the interest rate and the exchange rate, but also because demand and supply shocks in the oil market in turn may affect the real value of the dollar and real interest rates. We propose a novel identification strategy for disentangling the causal effects of oil demand and oil supply shocks from the effects of exogenous shocks to the U.S. real interest rate and exogenous shocks to the real value of the U.S. dollar. We empirically evaluate popular views about the role of exogenous real exchange rate shocks in driving the real price of oil, and we examine the extent to which shocks in the global oil market drive the U.S. real exchange rate and U.S. real interest rates. Our evidence for the first time provides direct empirical support for theoretical models of the link between oil prices, exchange rates, and interest rates.
Subfields: Economics and Econometrics, Renewable Energy, Sustainability and the Environment
View Paper: https://www.semanticscholar.org/paper/e19425d3a19f2a3fc28277c07e0462e9edc953dc
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Citations in the corpus
- The Macroeconomic Effects of Oil Supply News: Evidence from OPEC Announcements (2021, unknown): “This result supports the notion that oil price shocks transmit as shocks to the terms of trade and also helps to reconcile the significant fall in consumption expenditures documented above (see also Baumeister, Kilian, and Zhou, 2018, for a discussion of this point).”
- Adverse effects of rising interest rates on sustainable energy transitions (2019, background): “The difficulties to find evidence for an IR effect on commodities might be explained by complex interactions between the IR and commodity prices 34 .”