Analyzing Asymmetry in Exchange Rates of Arctic Nations in Response to Oil Price Shocks

ABSTRACT

This study introduces a novel approach by utilising both structural VAR and nonlinear ARDL methods to investigate the short‐ and long‐term asymmetric effects of different oil shocks—oil supply, aggregate demand and oil‐specific demand shocks—on the exchange rates of six Arctic nations: Canada, Finland, Denmark, Norway, Russia and Sweden, over the period from January 1994 to December 2022. Our findings indicate that oil‐specific demand shocks have a substantial impact on exchange rates in both the short‐ and long‐term, while oil supply and aggregate demand shocks have minimal effects on currency fluctuations. Importantly, our analysis reveals new evidence of long‐term asymmetry in the influence of oil shocks on exchange rates in these Arctic economies, with asymmetric effects mainly manifesting over the long‐term. Thus, our research enriches our understanding of the distinct impacts of different oil price shocks on exchange rates, especially within the relatively unexplored context of Arctic economies.