Oil prices and the rise and fall of the US real exchange rate

Abstract

Questions of the relative importance of real vs. monetary shocks in explaining exchange rate movements still have no widely accepted answer, despite their importance both for the research agenda and for policy questions. We examine this issue using a variety of empirical techniques for the US effective exchange rate. We find that a stable link exists between oil price shocks and the US real effective exchange rate over the post-Bretton Woods period. The results suggest that oil prices may have been the dominant source of persistent real exchange rate shocks and that energy prices may have important implications for future work on exchange rate behavior.