The Impact of Oil Prices on the Real Exchange Rate of the Dirham: a Case Study of the United Arab Emirates

摘要

This study investigated the impact of oil shocks on the real exchange rate of the UnitedArab Emirates (UAE) dirham. Time series data were used for the period 1977 to 2007covering four important oil shocks. Five variables have been used in this study, with thereal exchange rate of the dirham as the dependent variable and the gross domestic productper capita, oil price, trade balance, and foreign direct investment inflows as theindependent variables. In this study we used the Johansen-Juselius cointegrationprocedure, and conducted the Granger causality tests based on the VECM. Through thisresearch, we found that a fixed exchange rate to the U.S. dollar is not an appropriateexchange rate regime for the UAE. This is because when the price of oil increases, andwith a fixed exchange rate regime, this would lead to rapid growth in GDP and liquidity inthe UAE economy. This in turn causes domestic prices to increase, which results in highlevels of inflation.