Crude oil price hikes and exchange rate volatility: A lesson from the Bangladesh economy

• Published in: Resources policy Vol. 91; p. 104858
• Main Authors: Nandi, Biplob Kumar, Kabir, Md Humayun, Nandi, Mohitosh Kumar
• Format: Journal Article
• Language: English
• Published: Elsevier Ltd 01.04.2024
• Subjects: Asymmetric impacts; Crude oil price; Currency movements; Exchange rate; External vulnerability; Price volatility; Crude oil price; External vulnerability; Currency movements; Asymmetric impacts; Price volatility; Exchange rate
• ISSN: 0301-4207; 1873-7641
• DOI: 10.1016/j.resourpol.2024.104858

Crude oil price volatility has drawn greater concern for the prudent exchange rate policy as well as price stability. Net oil-importing countries, like Bangladesh, experience persistent currency devaluation due to the oil price volatility in the international market. Understanding the relationship between oil price and exchange rate nexus, this study examines the oil price and exchange rate volatility by using daily time series data from 2015 to 2023. Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and exponential GARCH (EGARCH) models have been used to analyze the effects of oil price shocks on the nominal exchange rate. According to the study, a rise in oil prices leads to a depreciation of Bangladesh's taka vis-à-vis the US dollar. The study also shows that oil price shocks have a long-lasting impact on exchange rate volatility, and the shocks to exchange rate volatility have an asymmetric effect, implying that the negative shocks give rise to higher volatility of exchange rates than positive shocks. This is an original study that contributes to the research gap by explaining the nexus between oil price and exchange rates. •Understanding the nexus between oil price and exchange rate.•Generalized Autoregressive Conditional Heteroskedasticity (GARCH) and exponential GARCH (EGARCH) models.•Oil price shocks have a long-lasting impact on exchange rate volatility.•Oil price volatility has an asymmetric impact on the returns on the exchange rate.