Nonlinear and Asymmetric Impact of Oil Prices on Exchange Rates: Evidence from South Asia

Abstract

The study analyses the asymmetric and nonlinear influence of oil price on exchange rates of South Asian countries in time–frequency framework using wavelet technique. For empirical analysis, monthly data are examined from July 1983 to June 2018. Wavelet coherence results show that the variables are in phase, i.e., oil prices and exchange rates are positively correlated. It suggests that oil price influences exchange rates positively. The study also investigates the causal association between oil price and exchange rates using a nonlinear causality test. The results of nonlinear causality show that there is bidirectional causality between oil price and exchange in Bangladesh and India and unidirectional causality from oil price to exchange rate in Pakistan and Sri Lanka. The findings provide some important recommendations to investors and policy makers.

Keywords

• oil price
• exchange rates
• wavelet
• causality
• south asia
• c22
• f31
• q43