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Do oil prices predict the exchange rate in Algeria? Time, frequency, and time‐varying Granger causality analysis

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Abstract

This study investigates whether international crude oil prices predicted the exchange rate in Algeria between January 1988 and June 2022. This paper does so by employing a variety of causality tests. More specifically, the causal linkages are checked using various time domain causality tests, the frequency domain causality test proposed by Breitung-Candelon (J Econom 132(2):363–378, 2006) and the time-varying causality test recently developed by Shi et al. (2018, 2020). The different causality tests suggest that fluctuations in Brent crude oil prices do not cause the real effective exchange rate. These findings are robust to introducing alternative exchange rates and crude oil price proxies. The analysis is further extended by considering the asymmetric and volatile behaviors of crude oil prices. The time-varying causality test indicates that the real effective exchange rate exhibits a significant response solely to decreases in oil prices. Finally, oil price volatility obtained from the EGARCH (2,2) model has predictive power on the exchange rate following each decline in crude oil prices. The discussion and policy recommendations are subsequently provided.

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Notes

  1. Results of the different ARCH-type models are available from the corresponding author on reasonable request.

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Authors and Affiliations

  1. LEPPESE Laboratory, University Centre of Maghnia, Maghnia, Algeria

    Hicham Ayad & Miloud Ouafi

  2. Northern Border University, Arar, Saudi Arabia

    Ousama Ben-Salha

  3. University of Sousse, Sousse, Tunisia

    Ousama Ben-Salha

  4. Economic Research Forum, Giza, Egypt

    Ousama Ben-Salha

Authors
  1. Hicham Ayad
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  2. Ousama Ben-Salha
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  3. Miloud Ouafi
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Correspondence to Ousama Ben-Salha.

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Appendix

Appendix

See (Table 5.

Table 5 Time and frequency domain causality test results between WTI and REER
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Table 6 Time and frequency domain causality test results between Brent and NEER
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6,

Table 7 Time and frequency domain asymmetric causality test results between Brent and REER
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7 and

Table 8 Time and frequency domain causality test results between Brent volatility and REER
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8) and (Figs. 

Fig. 6
figure 6

Frequency domain causality test results between WTI and REER

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6,

Fig. 7
figure 7

Time-varying causality test results between WTI and REER. a. FE window, b. RO window, RE window

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7,

Fig. 8
figure 8

Frequency domain causality test results between Brent and NEER

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8,

Fig. 9
figure 9

Time-varying causality test results between Brent and NEER. a: FO window, b. RO window, c. RE window

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9,

Fig. 10
figure 10

Asymmetric frequency domain causality test results between Brent and REER. a Positive changes in \(Brent\), b negative changes in \(Brent\)

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10,

Fig. 11
figure 11

Time-varying causality test results between positive changes in Brent and REER. a FO window, b RO window, c RE window

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11,

Fig. 12
figure 12

Time-varying causality test results between negative changes in Brent and REER. a FO window, b RO window, c RE window

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12,

Fig. 13
figure 13

Frequency domain causality test results between Brent price volatility and REER

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13 and

Fig. 14
figure 14

Time-varying causality test results between Brent price volatility and REER a FO window, b RO window, c RE window

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14).

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Ayad, H., Ben-Salha, O. & Ouafi, M. Do oil prices predict the exchange rate in Algeria? Time, frequency, and time‐varying Granger causality analysis. Econ Change Restruct 56, 3545–3566 (2023). https://doi.org/10.1007/s10644-023-09545-1

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