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Vol. 70, No. 4, pp. 289-311 (2019)

“Impacts of Oil Price Fluctuations on Exchange Rates and Macroeconomic Variables: A Multi-Country Analysis”
Tokuo Iwaisako (Institute of Economic Research, Hitotsubashi University), Hayato Nakata (School of Economics, Meisei University)

This paper employed a structural vector autoregression model in a quantitative assessment of the effect of exogenous shocks related to oil price determination on countries’ exchange rates and outputs. Because we were interested in the effect of oil price changes on energy exporters and importers, we chose Australia, Canada, Japan, Norway, and the UK as sample countries. This model comprised of four structural shocks: (i) oil supply shocks, (ii) global demand shocks, (iii) oil price fluctuations that are not related to supply and demand, and (iv) pure exchange rate fluctuations not related to other structural shocks. Various responses to structural shocks explain the correlation structure of the currencies. Moreover, pure exchange rate shocks are the main sources of exchange rate volatility. We also examined the role of structural shocks in explaining macro variables, taking Australia and Japan as examples. We thus discovered that global demand shocks and non-fundamental oil price fluctuations have a strong impact on GDP and export growth for both countries, while pure exchange rate shocks were relatively unimportant in explaining Japan's macroeconomic variables.