How geopolitical risk drives exchange rate and oil prices? A wavelet-based analysis

Venezuela's oil-dependent economy is severely affected by geopolitical instability, causing hyperinflation and devaluation of the national currency. Therefore, this study intends to examine the nexus among geopolitics, exchange rate, and oil prices by employing the Wavelet analysis for a sample ranging from 2008 to 2019. The results reveal that oil prices and exchange rates have a bidirectional causal relation from 2017 to 2019. Similarly, geopolitics and oil prices cause each other from 2017 to 2019. A medium-run co-movement between geopolitical risk and exchange rates is observed from 2015 to 2019. We notice that oil prices and exchange rates exhibit a causal relation from 2008 to 2011 and from 2018 to 2019. The results support the theoretical model and are in line with the actual dynamics of the economy. Based on our results, we conjecture that Venezuela has to reduce its oil dependence since it is susceptible to geopolitical risk, avoid regional conflicts, and manage exchange rates to achieve sustainable growth.