Estimation of Long-run Relationship between Crude Oil and US’ Dollar Value: A Cointegration Analysis

Document Type: Original Research

Authors

1 Freelance Researcher and Independent Actuarial Consultant, ECO College of Insurance, Allameh Tabatabaee University, Tehran, Iran

2 Department of Economics, Alzahra University, Tehran, Iran

3 Freelance Researcher, Payame Noor University, Tehran, Iran

Abstract

Crude oil price and US dollar value are the two critical economic variables influencing global economy. The purpose of this research is to study the sustained long-run relationship between these two variables. The fact that Crude oil price is determined in dollar and that oil price and dollar exchange rate, since 1970, underwent many changes at international markets raised this question that what is the relationship between these two variables. For this purpose, co-integration and causality tests were used for variables within 1990-2013. Research results show that there is a negative relationship between crude oil price and dollar value such that if the real price of crude oil increases up to 10%, dollar real value decreases to 1.7%. Causality direction is from oil price variable to US dollar price. In addition, estimating short-term error correction relationship for dollar exchange rate long-run equation, it is seen that if dollar real exchange rate deviates from its long-run trend, the gap will be restored at 4.1% rate per period as long as returning to the very long-run path.

Keywords


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