Oil prices and exchange rate volatility in Arab countries

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.

Keywords:

• AMF
• exchange rates
• oil prices
• GARCH

JEL Classification:

• F31
• C22
• E52
• F33

Notes

¹ See Fischer (2001) for summary statement about this view. Other authors supporting that view are Eichengreen (1994), Obstfeld and Rogoff (1995) and Summers (2000).

² One could also refer to Calvo-Reinhart's (2002) ‘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.