Estimating Equilibrium Exchange Rates for Major Oil Exporting Countries, 1970-2005

The purpose of this paper is to study the main determinants of the bilateral real exchange rates for major oil exporting countries vis-à-vis the US dollar. Taking into account the impact of the real oil prices on real exchange rates, it may be observed that oil prices play a significant part in determining the terms of trade. In addition to the real oil price, two other fundamental factors that are purported to influence the behavior of the real exchange rate, namely, the productivity differentials and a term reflecting the demand-side bias were examined as well. Unbalanced panel data, covering the period within 1970-2005, were used for estimating the parameters of the model. Estimation result shows that elasticity of the real exchange rates with respect to oil prices are 0.13. It is observed that a rise in the real oil prices leads to an improvement in the terms of trade, and consequently lowers the real exchange rates, and causes a real appreciation of oil exporting countries’ currencies. Moreover, according to our estimations results, the existence of the Balassa-Samuelson effect is also confirmed in the economies of the oil exporting countries. Difference in exchange rate regimes was examined, too. Increases in government expenditure resulted in different behavior of real exchange rates in the oil exporting countries with different exchange rate regimes.