ASIAN REAL EXCHANGE RATES AND OIL PRICES: A COINTEGRATION ANALYSIS UNDER STRUCTURAL BREAKS

We examine the long-run relationship between Asian real exchange rates and oil prices in the presence of structural breaks. The relevance of considering breaks is demonstrated by utilizing the Johansen et al. procedure that allows for up to two predetermined breaks. Using conventional tests that do not consider breaks reveals no evidence of cointegration. However, the Johansen et al. procedure clearly demonstrates the importance of considering breaks and provides strong support for a stable long-run relationship in all but Japan and the Philippines. Moreover, the results suggest evidence of bi-directional causality in Malaysia and Thailand, uni-directional causality from exchange rates to oil prices in Korea, the Philippines, and Singapore, uni-directional causality from oil prices to the exchange rate in Indonesia, and no evidence of causality in Japan.