On the relationship between oil price and exchange rates: A wavelet analysis

- The relationship between exchange rates and oil prices is still ambiguous.
- We assess this relationship in the time-frequency space using wavelet analysis.
- We show that the strength of this relationship changes over the time horizon.

We may find numerous works in the existing literature regarding the cohesion between oil prices and exchange rates, yet an exact shape of the relationship remains undefined. By restoring to wavelet analysis and using a rich database from Japan, this study contributes to the literature by investigating the said relationship within the time-frequency space. Over the time horizon, it is being established that the strength of the relationship between oil price and exchange rate keeps changing. If the Bank of Japan needs to control the exchange rate, it should give proper importance to shocks on oil prices, while formulating exchange rate policy.