# Oil Prices and Exchange Rates: Measurement Matters

## Abstract

**:**

## 1. Introduction

## 2. Existing Work

## 3. Results: Measurement Matters

#### 3.1. Price Measures

_{oil}), along with three other price levels: the U.S. CPI (P

_{cpi}); the price of non-monetary gold exports (P

_{gold}); and the IMF’s Global Commodity Price Index (P

_{comm}); all of these price indexes are based on U.S. dollars and the figure shows them scaled to 100 for the first observation in January of 2003. (The data come from the St. Louis Federal Reserve’s Fred: https://fred.stlouisfed.org/ (accessed on 8 September 2022). P

_{cpi}: Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Index 1982–1984 = 100, Monthly, Seasonally Adjusted. Fred mnemonic: CPIAUCSL. P

_{oil}: Crude Oil Prices: West Texas Intermediate (WTI)—Cushing, Oklahoma, USD per Barrel, Monthly, Not Seasonally Adjusted. Fred mnemonic: DCOILWTICO. P

_{gold}: Export Price Index (End Use): Nonmonetary Gold, Index 2000 = 100, Monthly, Not Seasonally Adjusted. Fred mnemonic: IQ12260. P

_{comm}: Global Price Index of All Commodities, Index 2016 = 100, Monthly, Not Seasonally Adjusted: PALLFNFINDEXM.)

#### 3.2. Unconditional Correlations

#### 3.3. Vector Error Correction Modeling

## 4. Materials and Methods

#### 4.1. Formulation

- ${p}_{comm}$ is the logarithm of the real price of oil
- q is the logarithm of BIS’ broad real effective exchange rate of the dollar
- ${r}_{\frac{yen}{\$}}$ is the logarithm of the price-adjusted price of the dollar in terms of yen
- ${r}_{\frac{pound}{\$}}$ is the logarithm of the price-adjusted price of the dollar in terms of the pound sterling
- ${r}_{\frac{rmb}{\$}}$ is the logarithm of the price-adjusted price of the dollar in terms of the renminbi
- ${r}_{\frac{euro}{\$}}$ is the logarithm of the price-adjusted price of the dollar in terms of the euro

#### 4.2. Time-Series Properties

#### 4.3. Granger Causality

^{2}(n) test where n is the number of restrictions.

#### 4.4. Cointegration

#### 4.5. Congruency

#### 4.5.1. Parameter Constancy

#### 4.5.2. Residuals Properties

#### 4.5.3. Dynamic Stability

#### 4.5.4. Forecasting Performance

_{comm}from January 2020 to April 2022 (the “one-step-ahead” refers to the practice of financial forecasters of starting their forecasts from the most recent data).

## 5. Conclusions

## Funding

## Institutional Review Board Statement

## Informed Consent Statement

## Data Availability Statement

## Acknowledgments

## Conflicts of Interest

## References

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**Figure 7.**ADF tests for levels (left panel) and growth rates (right panel). The critical values for rejection are: 5% = −1.94, 1% = −2.58.

**Figure 8.**Constancy Tests for model using ${p}_{comm}$ and Effective Exchange Rates. Blue line denotes the 1% critical rejection value.

**Figure 9.**Parameter Constancy Tests for model using ${p}_{comm}$ and Bilateral Exchange Rates. Blue line denotes the 1% critical rejection value.

**Figure 10.**Responses for ${p}_{comm}$ and Effective Exchange Rate. Note: row-headings list the residual that is being shocked; the column-headings indicate the variable that is affected.

**Figure 11.**Responses for ${p}_{comm}$ Bilateral Exchange Rates. Note: row-headings list the residual that is being shocked; the column-headings indicate the variable that is affected.

Study | Measure of USD | Sample | Estimation | China |
---|---|---|---|---|

Method | Included? | |||

Huang et al. (2020) 7] | Bilateral Rates | 1997–2015—Monthly | PMG | yes |

Reboredo et al. (2014) [11] | Bilateral Rates | 2000–2012—Monthly | Cross-Corr. | no |

Fratzscher et al. (2014) [12] | NEER | 2001–2012—Daily | Het. Ident. | no |

Grisse (2010) [13] | NEER | 2003–2010—Weekly | SVAR | no |

Breitenfellner et al. (2008) [4] | (EUR/USD) | 1983–2006—Monthly | VECM | no |

Cheng (2008) [6] | NEER & REER | 2000–2007—Monthly | DOLS | no |

Yousefi et al. (2005) [14] | REER | 1989–1999—Monthly | Egl–Grger | no |

Bénassy-Quéré et al. (2005) [5] | REER & (EUR/USD) | 1974–2004—Monthly | ECM | yes |

Amano et al. (1998) [10] | REER | 1972–1993—Monthly | VECM | no |

This study | REER & Bilateral Rates | 2003–2022—Monthly | VECM | yes |

Parameter | Residuals’ | ||||
---|---|---|---|---|---|

Study | Constancy | Properties | Forecasts | Stationarity | Causality |

Huang et al. (2020) [7] | no | no | no | yes | no |

Reboredo et al. (2014) [11] | no | no | no | no | yes |

Fratzscher et al. (2014) [12] | no | no | no | no | yes |

Grisse (2010) [13] | no | no | no | no | yes |

Breitenfellner et al. (2008) [4] | no | no | yes | no | no |

Cheng (2008) [6] | no | no | no | no | no |

Yousefi et al. (2005) [14] | no | no | no | no | no |

Bénassy-Quéré et al. (2005) [5] | no | indep. | no | yes | yes |

Amano et al. (1998) [10] | no | no | yes | yes | yes |

This study | yes | yes | yes | yes | yes |

**Table 3.**Long-run effect of a 1% appreciation in the real value of the dollar on the real price of oil—2003–2019.

Measure of Deflator for Nominal Price of Oil | |||||||
---|---|---|---|---|---|---|---|

P_{cpi} | P_{com} | P_{gold} | |||||

Measure of Exchange Rate | coeff | se | coeff | se | coeff | se | |

Effective | −3.85 | 0.56 | −0.84 | 0.31 | −3.21 | 2.42 | |

Bilateral | Lryen | 0.44 | 0.42 | 0.37 | 0.15 | 0.897 | 0.315 |

Lrrmb | −0.60 | 0.43 | 0.15 | 0.15 | 1.759 | 0.318 | |

Lrps | 0.72 | 0.66 | 0.23 | 0.23 | −0.383 | 0.488 | |

Lreuro | −3.88 | 0.83 | −1.47 | 0.29 | −3.244 | 0.616 | |

Sum | −3.31 | 0.81 | −0.72 | 0.27 | −0.971 | 0.55 |

Measure of Deflator | |||
---|---|---|---|

P_{cpi} | P_{comm} | P_{gold} | |

Measure of Exchange Rate | |||

Effective | 21.717% | 16.490% | 22.261% |

Bilateral | 21.748% | 15.986% | 22.029% |

H_{0} | n | p-Value for χ²(n) | |
---|---|---|---|

Model 1 | p$\nrightarrow $q | 3 | 0.296 |

q$\nrightarrow $p | 3 | 0.017 | |

Model 2 | p$\nrightarrow $r | 12 | 0.93 |

r$\nrightarrow $p | 12 | 0.036 |

Model 1 | Model 2 | |||
---|---|---|---|---|

Rank of Π | Max | Trace | Max | |

0 | 0.004 | 0.008 | 0.007 | 0 |

1 | 0.068 | 0.068 | 0.599 | 0.663 |

2 | 0.696 | 0.776 | ||

3 | 0.664 | 0.872 | ||

4 | 0.327 | 0.327 |

^{2}(2).

H_{0}: Indep. | H_{0}: Homosk. | H_{0}: Normality | ||
---|---|---|---|---|

Model 1 | p_{comm} | 0.1297 | 0.129 | 0.3362 |

q | 0.2876 | 0.9537 | 0.0001 | |

Model 2 | p_{comm} | 0.385 | 0.669 | 0.117 |

r_{yen/$} | 0.219 | 0.2421 | 0.8608 | |

r_{euro/$} | 0.316 | 0.0002 | 0.9368 | |

r_{pound/$} | 0.311 | 0.0182 | 0.0295 | |

r_{rmb/$} | 0.749 | 0.3127 | 0.0002 |

^{2}(2).

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**MDPI and ACS Style**

Marquez, J.
Oil Prices and Exchange Rates: Measurement Matters. *Commodities* **2022**, *1*, 50-64.
https://doi.org/10.3390/commodities1010005

**AMA Style**

Marquez J.
Oil Prices and Exchange Rates: Measurement Matters. *Commodities*. 2022; 1(1):50-64.
https://doi.org/10.3390/commodities1010005

**Chicago/Turabian Style**

Marquez, Jaime.
2022. "Oil Prices and Exchange Rates: Measurement Matters" *Commodities* 1, no. 1: 50-64.
https://doi.org/10.3390/commodities1010005