Dynamic connectedness and causality between oil prices and exchange rates

Gómez-González, José Eduardo; Hirs-Garzón, Jorge; Uribe-Gil, Jorge Mario

Dynamic connectedness and causality between oil prices and exchange rates

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Borradores de Economía; No. 1025

Date published

2017-10-30

Date

2017-10-30

Authors

Gómez-González, José Eduardo
Hirs-Garzón, Jorge
Uribe-Gil, Jorge Mario

Document language

eng

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Las opiniones contenidas en el presente documento son responsabilidad exclusiva de los autores y no comprometen al Banco de la República ni a su Junta Directiva.

The opinions contained in this document are the sole responsibility of the author and do not commit Banco de la República or its Board of Directors.

Abstract

We study connectedness and causality between oil prices and exchange rates dynamically. Using data on the WTI and exchange rate returns for six countries in which oil production is a major production activity, we show that oil prices are net receptors of spillovers from excahnge rate markets. Connectedness exhibits important time variation and presents a positive trend during our sample period. We find evidence of bidirectional causality between oil prices and exchange rates, which presents also considerable time-variation. Causality is identified for longer periods of time from oil prices to exchange rates. However, we also find evidence of reverse causality, mainly in the period after the Subprime Financial Crisis. Our results provide evidence supporting the hypothesis of the financialization of oil markets.