Equilibrium Exchange Rates in Oil-Dependent Countries

23 Pages Posted: 19 Jul 2007

See all articles by Iikka Korhonen

Iikka Korhonen

Bank of Finland - Institute for Economies in Transition (BOFIT)

Tuuli Juurikkala

Bank of Finland

Date Written: April 4, 2007


We assess the determinants of equilibrium real exchange rates in a sample of oil-dependent countries. Our basic data cover OPEC countries from 1975 to 2005. We also include three oil-producing Commonwealth of Independent States (CIS) countries in our robustness analysis. Utilising several estimation techniques, including pooled mean group and mean group estimators, we find that the price of oil has a clear, statistically significant effect on real exchange rates in our group of oil-producing countries. Higher oil price lead to appreciation of the real exchange rate. Elasticity of the real exchange rate with respect to the oil price is typically between 0.4 and 0.5, but may be larger depending on the specification. Real per capita GDP, on the other hand, does not appear to have a clear effect on real exchange rate. This latter result contrasts starkly with the consensus view of real exchange rates determinants, emphasising the unique position of oil-dependent countries.

Keywords: equilibrium exchange rate, pooled mean group estimator, resource dependency

JEL Classification: F31, F41, P24, Q43

Suggested Citation

Korhonen, Iikka and Juurikkala, Tuuli, Equilibrium Exchange Rates in Oil-Dependent Countries (April 4, 2007). BOFIT Discussion Paper No. 8/2007, Available at SSRN: https://ssrn.com/abstract=1001626 or http://dx.doi.org/10.2139/ssrn.1001626

Iikka Korhonen (Contact Author)

Bank of Finland - Institute for Economies in Transition (BOFIT) ( email )

P.O.Box 160
Helsinki 00101

Tuuli Juurikkala

Bank of Finland ( email )

P.O. Box 160
FIN-00101 Helsinki

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