Asymmetric Dynamics Between Exchange Rates and Crude Oil Prices: A Cross-Country Assessment

Abstract

This study examines whether there exists nonlinearity between exchange rates and crude oil prices for two developing economies (i.e., Pakistan and Sri Lanka) by taking data from January 2010 to March 2024. To identify structural break (asymmetry), Zivot-Andrews unit root test has been utilized. Further, nonlinear and linear Granger Causality tests have been practiced to inspect the symmetry and asymmetry between unrefined oil prices and exchange rates. A unidirectional symmetry causality has been recognized between prices of unrefined oil and exchange rates while no asymmetry causality has been identified. These results advocate that swings in crude oil prices do not forecast potential shifts in these two nations' currency rates in a nonlinear way, and vice versa. The lack of nonlinear causation may reflect the complexities of the mutual influence between oil prices and currency rates, in which other aspects such as monetary policy, external shocks, or market processes may act more importantly in shaping their dynamic linkages.