Eesti Pank - Bank of Estonia

We assess the determinants of equilibrium real exchange rates in a sample of oil-dependent countries. Our main sample runs from 1980 to 2003, and consists of OPEC countries, but in our robustness analysis we also include some oil-producing Commonwealth of Independent States (CIS) countries. We utilise several different panel estimation techniques, including pooled mean group and mean group estimators. We find that real price of oil has a clear and statistically significant effect on real exchange rate in our group of oil-producing countries. Elasticity of the real effective exchange rate with respect to the real price of oil is between 0.5 and 1, depending on the exact specification. On the other hand, variables like per capita real GDP or net foreign asset position of a country do not seem to have much effect on real exchange rates. This latter result is in stark contrast with the general consensus regarding the determinants of real exchange rates, emphasising the unique position of oil-dependent countries.