The nexus between oil price and Russia's real exchange rate: Better paths via unconditional vs conditional analysis

- The paper investigates the nexus between oil price and Russia's real exchange rate unconditionally and conditioning upon potential control variables.
- Data were analyzed using an ARDL bounds testing method, wavelet coherence, wavelet-based signal detection and frequency domain causality test.
- A sharp causality running from oil price to real exchange rate is highly supported in lower frequencies.
- The link between oil price and real exchange rate seems conditioning upon GDP, government expenditures, terms of trade and productivity differential.
- The conditional analysis and signal detection appear as meaningful exercises to find clearer outcomes.

Instead of analyzing the causality between two time series (unconditional analysis), as it is usually done, the present study deals with the nexus between oil price and Russia's real exchange rate conditioning upon potential control variables at well-specified horizons and on a frequency by frequency basis. This research accounts also for the possible transient linkages and signal discontinuities. A major finding of this paper is deeply suggestive of a sharp causality running from oil price to real exchange rate in lower frequencies. This implies that Russia should better tackle with turbulence triggered by oil price and continue to reduce its energy dependency via drastic and proactive measures. The economic and fiscal initiatives of Putin administration may help to cope with sudden shocks, to lessen the great oil dependence and to build confidence needed for economic recovery. While our research does not say much about the routes through which oil price may affect differently real exchange rate, it clearly indicates the presence of short-term relationship conditional to GDP, government expenditures, terms of trade and productivity differential. The conditional analysis and signal detection appear as meaningful exercises to find new insights into the focal issue.

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