Global Exchange Rate Configurations: Do Oil Shocks Matter?

Do oil shocks matter for exchange rates? This paper identifies three structural shocks that impact on the oil market and analyzes their effect on exchange rates in 43 advanced and emerging countries. It finds that oil-exporting countries tend to experience appreciation pressures after oil shocks, especially oil demand shocks, which are largely offset by foreign exchange reserves accumulation. A main theoretical prediction of most general equilibrium models, namely that shocks leading to increases in oil prices are associated with a real appreciation of oil exporters, is not supported by the paper's results, as oil producers either peg their exchange rate or accumulate foreign exchange reserves in the wake of these shocks, even when they have floating currencies.