Can Oil Prices Forecast the Exchange Rate?: Evidence from Algeria

摘要

Because the pricing of crude oil is made in American dollars internationally, changes in oil price directly affect the exchange rates of the countries. For this reason, the purpose of research is to highlight the relationship between oil price and nominal US Dollar/Algerian Dinar exchange rate through an empirical analysis using a VECM Model (Vector error correction model) upon monthly data for the period 2008-2015. Results show that a cointegration relationship is detected between oil and exchange rate in Algeria, with bilateral trend causality in short and long run time horizon. Furthermore, the relationship of the out simple predictive indicates that a change in oil price would tend to depreciate Algerian Dinar against US Dollar. This negative impact emphasizes how the Algerian dinar is a non-oil currency and explains how the foreign exchange receipts from hydrocarbon exports help swell Algerian public spending that would cater for public budget deficit curtailment.