As an invoice currency the US dollar is frequently cited to cause changes in real oil prices through a demand and supply channel. The aim of this paper is to shed more light on whether the US dollar is driving oil prices.
In order to do so, we incorporate the bivariate relationship in a broader demand and supply framework in which real oil prices are determined by demand and supply factors. We find cointegration among the variables involved and that the value of the US dollar is a significant part in the long-run relationship. The causal links within the long-run relationship are examined using the procedure suggested by Toda & Yamamoto (1995) to test for Granger causality in the presence of I(1) variables.
The results show that no causal effect of the US dollar on oil prices can be found. This contradicts the view that the US dollar is driving real oil prices. There is even evidence that none of the fundamentals is causing real oil prices. Moreover, real oil prices are found to have an indirect causal effect on the US dollar. This contradicts standard models such as the Krugman (1983) model which suggest a direct link.
Inhaltsverzeichnis (Table of Contents)
- Introduction
- Literature review
- Theoretical foundations
- Data
- Methodology
- Empirical results
- Conclusion
Zielsetzung und Themenschwerpunkte (Objectives and Key Themes)
This paper aims to investigate the relationship between the value of the US dollar and oil prices. The paper examines whether the US dollar drives oil prices through a demand and supply channel by incorporating this bivariate relationship into a broader demand and supply framework. This framework considers other factors that contribute to demand and supply besides the US dollar.
- The role of the US dollar as a demand and supply factor for oil prices
- The relationship between the US dollar and oil prices in the long-run
- The causal links between the US dollar and oil prices
- The impact of other demand and supply factors on oil prices
- The theoretical foundations of the demand and supply model for oil prices
Zusammenfassung der Kapitel (Chapter Summaries)
The Introduction outlines the importance of oil prices in the global economy and the frequent citation of the US dollar as a significant factor influencing oil prices. The paper aims to investigate this relationship using a broader demand and supply framework, focusing on the potential causal links between the US dollar and oil prices.
The Literature review analyzes previous studies that incorporated the US dollar as a demand and supply factor in a structural demand and supply model. These studies, often referred to as "demand and supply literature," utilized cointegration tests to examine the long-run relationship between oil prices and the US dollar.
The Theoretical foundations section delves into the economic theory behind the demand and supply model used in the paper, providing explanations for the potential causal effects of oil prices on the US dollar.
The Data section discusses the specific measurements of the demand and supply factors and the chosen sample period for the analysis.
The Methodology section outlines the econometric methods used to test for the existence of a long-run relationship between oil prices and the fundamentals, to estimate the parameters of this relationship, and to conduct inference on those parameters. It also presents a Granger causality test.
Schlüsselwörter (Keywords)
The main keywords and focus topics of this work include oil prices, US dollar, demand and supply, cointegration, Granger causality, long-run relationship, demand and supply factors, economic theory, econometric methods.
- Quote paper
- Etienne Jungbluth (Author), 2012, Is the Value of the US Dollar Driving Oil Prices?, Munich, GRIN Verlag, https://www.grin.com/document/358681
