Oil prices and Kazakhstan's real exchange rate: An ARDL bound test approach

Abstract

Using different real exchange rate indexes and bound test approach, this paper investigates the effect of real oil prices on Kazakhstan's real exchange rate. Results of long run ARDL approach show that increases in real oil prices causes appreciation of real effective exchange rate index which includes all trading partners of Kazakhstan or the countries outside of CIS, but causes depreciation in real effective exchange rate index which includes only CIS countries. Alongside this, ARDL error correction model shows that deviation from long run relationship is corrected in a shorter span of time when real effective exchange rate index which includes CIS countries is taken into account. The results indicate that in order to ensuring real exchange rate stability, it is important to maintain the development of other sectors together with rapid growing oil and gas sectors and to increase trade with oil rich neighbouring countries.