Heterogeneity in the nominal exchange rate response to oil price shocks in oil-exporting countries: a new episode of the ‘fear of floating’?

ABSTRACT

In this paper, we propose that the heterogeneity in the nominal exchange rate response to oil price shocks in oil-exporting countries with flexible regimes is influenced by monetary authority interventions. Thus, we identify three structural oil price shocks, and we estimate pooled OLS regressions for a panel of 27 oil-exporting economies. The results show that economies with higher international reserve accumulation experience lower exchange rate appreciation during oil-specific demand shocks.

KEYWORDS:

• Exchange rate
• oil price
• international reserves
• fear of floating

JEL CLASSIFICATION:

• F31
• Q47

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

¹ As shown in Hall et al. (1995), the block length that minimizes the mean squared error is proportional to $n^{\frac{1}{3}}$, where $\mathit{n}$ is the sample size. With a sample size of $\mathit{n}=204$ in the first stage, ${\mathrm{\ell }}_{\mathit{opt}}\propto {204}^{\frac{1}{3}}\approx 6$. After estimating with block lengths of 6, 12, and 24 months, we found that the block size of 12 has the lowest RMSE.