Oil Price Dynamics and Exchange Rates in Selected OPEC Countries: A Dynamic Panel Threshold Regression Approach

Abstract

This study examined the influence of oil price dynamics on the exchange rates in selected Organization of the Petroleum Exporting Countries (OPEC) utilizing a dynamic panel threshold regression model over the period from 1985 to 2022. Various analytical techniques were employed, including the Brock-Durlauf-Chang-Scheinkman (BDS) test for nonlinearity, Cross-Sectional Dependence (CD) tests, a Panel Unit Root Test that accounts for cross-sectional dependence and structural breaks, as well as the Westerlund Error Correction Model (ECM) Panel Cointegration Test. From the result of the study, a threshold effect associated with oil prices was identified, as 4.526%. Specifically, when oil prices dip below these thresholds, the real exchange rate declines. In contrast, when oil prices exceed this threshold, the real exchange rate generally appreciates. Additionally, the results emphasize that structural breaks play a critical role in influencing exchange rates among OPEC member nations, with varying effects in both short and long run. Consequently, the study recommends that real oil prices should ideally not fall below the identified threshold and suggests diversifying the economy to diminish the reliance on oil exports, thereby lessening the adverse effects of changes in oil price on exchange rates.