Do fluctuations in crude oil prices have symmetric or asymmetric effects on the real exchange rate? Empirical evidence from Indonesia

• Published date: 01 January 2021
• Date: 01 January 2021
• Author: Yoon Jung Choi,Jungho Baek
• DOI: http://doi.org/10.1111/twec.12987

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wileyonlinelibrary.com/journal/twec World Econ. 2021;44:312–325.

© 2020 John Wiley & Sons Ltd

Received: 7 November 2018

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Revised: 16 May 2020

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Accepted: 21 May 2020

DOI: 10.1111/twec.12987

ORIGINAL ARTICLE

Do fluctuations in crude oil prices have symmetric

or asymmetric effects on the real exchange rate?

Empirical evidence from Indonesia

JunghoBaek1

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Yoon JungChoi2

1Department of Economics, School of Management, University of Alaska Fairbanks, Fairbanks, AK, USA

2Center for ASEAN & Indian Studies and Cooperation, The Sejong Institute, Seongnam, Korea

KEYWORDS

asymmetry, crude oil, exchange rate, Indonesia, non-linear ARDL

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INTRODUCTION

Do fluctuations in crude oil prices play a decisive role in influencing a country's real exchange move-

ments? This is an interesting question for two reasons. First, it is the most fundamental question for

macroeconomic policy. If it is established that a hike in oil prices has a beneficial effect on countries'

real incomes and hence leads to an appreciation in their currencies, e.g., not many countries would

choose expansionary monetary policy solely aimed at deliberate currency depreciation as a means

to economic growth. The answer to this question is also interesting because, although the subject

has long been a hotly debated area of empirical inquiry, the answer is not yet settled. Indeed, the oil

price impacts on real exchange rate fluctuations vary depending on countries and are necessarily an

empirical issue.

Since the seminal work by Krugman (1983a, 1983b), many scholars have sought to identify how

real exchange rates in various countries are influenced by changes in crude oil prices. Examples in-

clude, but are not limited to, Rogoff (1991), Amano and Van Norden (1995, 1998), Chaudhuri and

Daniel (1998), Chinn (2000), Camarero and Tamarit (2002), Akram (2004), Chen and Chen (2007),

Huang and Guo (2007), Narayan, Narayan, and Prasad (2008), Chen, Rogoff, and Rossi (2010), Wu,

Chung, and Chang (2012), Benhmad (2012), Mohammadi and Jahan-Parvar (2012), Reboredo (2012),

Czudaj and Beckmann (2013), Tiwari, Dar, and Bhenja (2013) and Jahangard, Daneshmand, and

Tekieh (2017). Chen and Chen (2007), e.g., explore the oil price impacts on exchange rates in a sam-

ple of G7 countries and reveal that the price of crude oil has a sizeable effect on real exchange rates

in the long run. Reboredo (2012), in contrast, reports in identifying insignificant oil price impacts on

exchange rates in the case of the EU countries.

Important but perhaps less widely recognised in the literature, however, is the possibility that oil

price changes could have asymmetric impacts on a country's real exchange rate. More specifically, no