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Original Articles

Oil prices and exchange rate volatility in Arab countries

Pages 41-47 | Published online: 20 Apr 2012
 

Abstract

I test the bipolar view hypothesis on the exchange rates of countries of the Arab Monetary Fund (AMF) which are countries with relative free capital mobility. I find that oil price shocks seem to be the source of less flexible exchange rates.

JEL Classification:

Notes

1 See Fischer (Citation2001) for summary statement about this view. Other authors supporting that view are Eichengreen (Citation1994), Obstfeld and Rogoff (Citation1995) and Summers (Citation2000).

2 One could also refer to Calvo-Reinhart's (Citation2002) ‘fear of floating’.

3 Tunisia followed a soft peg until 2008.

4 The model to estimate was determined after performing the adequate tests.

5 The conditional variance for the GARCH(1,1) is defined as

6 The degree of persistence increases with (a 1 + b 1 + ½γ). The size of this sum indicates how much time the variance will take to start decreasing after a shock has caused an initial increase. When this sum is above 1, other things equal, the conditional variance would continue increasing for a long period of time.

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