Another Look at the Interaction Between Oil Price Uncertainty and Exchange Rate Volatility: The Case of Small Open Economies

The objective of this paper is to study the impact of the variability of oil prices on the real exchange rate for a small oil-importing economy (Morocco) and a small oil-exporting country (Tunisia) to compare the effect of fluctuations in oil prices on the volatility of exchange rate depending on the nature of the country. We used GARCH specifications taking into account several effects (symmetrical, asymmetrical, linear, nonlinear, threshold, power, level shift and jump intensity) in order to evaluate the empirical relationship between these variables and identify which of these effects is the most powerful. Our results reveal that whether for importing or exporting-oil economy, the real price of oil is negatively and significantly related to the variability of real exchange rate, which is remarkable across all estimates and all the effects considered. By introducing a dummy variable representing the two oil crises and the Asian crisis, the relationship between oil prices and the exchange rate has become more volatile and more persistent for the importing country and less intense for the exporting country, which means that the interaction oil price-exchange rate volatility depends greatly on switching regime.