Energy prices and exchange rates of the U.S. dollar: Further evidence from linear and nonlinear causality analysis

The causality relationships between energy prices and exchange rates have been investigated in many existing studies. Previous investigations ignore the possible nonlinear behaviors which may be caused by asymmetry, persistence or structural breaks. To fill this gap, we apply both linear and nonlinear causality tests to examine the causal relationships between energy prices and exchange rates of the U.S. dollar. Our results show that in the period before recent financial crisis, unidirectional linear causality running from petroleum prices to exchange rates and unidirectional nonlinear causality running from exchange rates to natural gas prices are revealed. In the period after the financial crisis, the bidirectional nonlinear causality relationships between petroleum prices and exchange rates can be found and there are no causality between exchange rates and natural gas prices. Moreover, we examine the source of nonlinear behaviors of causality relationships. Our evidence indicates that both volatility spillover and regime shift contribute to nonlinear causality and the explanation power of the former one is much stronger.

► Linear and nonlinear causality behaviors are tested. ► The causality behaviors between energy prices and exchange rates have differences among different energy commodities. ► The causality behaviors after the period of recent financial crisis are different from those before crisis. ► The major source of nonlinear causality behaviors is volatility spillover, not regime shift.