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Oil price and exchange rates: A wavelet based analysis for India

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  • Tiwari, Aviral Kumar
  • Dar, Arif Billah
  • Bhanja, Niyati

Abstract

In this paper, we explore linear and nonlinear Granger causalities between oil price and the real effective exchange rate of the Indian currency, known as ‘rupee’. First, we apply the standard time domain approach, but fail to find any causal relationship. So, we decompose the two series at various scales of resolution using the wavelet methodology in an effort to revisit the relationships among the decompose series on a scale by scale basis. We also use a battery of non-linear causality tests in the time and the frequency domain. We uncover linear and nonlinear causal relationships between the oil price and the real effective exchange rate of Indian rupee at higher time scales (lower frequency). Although we do not find causal relationship at the lower time scales, there is evidence of causality at higher time scales only.

Suggested Citation

  • Tiwari, Aviral Kumar & Dar, Arif Billah & Bhanja, Niyati, 2013. "Oil price and exchange rates: A wavelet based analysis for India," Economic Modelling, Elsevier, vol. 31(C), pages 414-422.
    • Handle: RePEc:eee:ecmode:v:31:y:2013:i:c:p:414-422
    DOI: 10.1016/j.econmod.2012.11.043
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    More about this item

    Keywords

    Oil price; Exchange rate; Non-linear causality; India; Wavelets;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy

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