The Real Exchange Rate of Oil Exporting Countries: An African Experience

Abstract

Oil prices traditionally have been more volatile than many other commodity or asset prices since World War II and has have a lot implications on major macroeconomic variables such as inflation, exchange rate, money supply, capacity utilisation and economic growth among others. The goal of this paper is investigate the long run effects of real oil price and real interest rate differential on real exchange rate for a quarterly panel of 3 countries from 1980 to 20012. The modelling exercise follows three steps. In the first step, the paper investigates the integration properties of the data and finds them to be integrated of order one. In the second step, using several different panel cointegration tests, the paper finds evidence for cointegration among the three variables. In the third step, using pooled mean group estimator, the paper finds a positive and statistically significant impact of real oil price on real exchange rate for net oil importing countries, implying that increase in oil price leads to real exchange rate depreciation.

Keyword: Exchange rate; oil price; Cointegration