Oil Rents and Exchange Rate in Oil-Exporting Countries: Re-Assessment of the Monetary Model of Exchange Rate Determination

Abstract

This study investigates why the exchange rates of oil-exporting countries do not follow the monetary model after the oil prices hikes in 2000. In empirical research, real GDP is considered as real output, while changes in oil rents are not included in GDP growth. However, in practice, oil rents give the citizens of a country the power to own the output of other countries without providing value-added. Therefore, we have re-established the basic form of the monetary model of exchange rate determination presented by Lucas (1982). The study introduces a new concept called the lower bound of the exchange rate [1] (LEX). ARDL bounds test on 18 oil-exporting countries' exchange rates shows a long-run relationship between oil rents and LEX. [1] Lower Bound of Exchange Rate or LEX is the minimum exchange rate that countries can maintain in the long run, depending on oil rents (% of exports).

Keywords: Exchange rates, Monetary models, Oil rents, Oil-exporting countries