Oil price shocks, exchange rate and uncertainty: case of Latin American economies
This paper examines the effects of oil demand and supply shocks on emerging market economies in Latin America using a Bayesian vector autoregressive (VAR) model that combines zero and sign restrictions. Our results highlight the importance of separately identify the oil market shocks. The higher price of oil driven by increased global demand produces higher output growth in Brazil, Colombia, and Chile. The results are more persistent for Brazil and Colombia likely due to increased income from oil exports, as both economies are net oil exporters. The better times in the domestic economies result in lower uncertainty and appreciation of the exchange rate in all countries in the sample. Oil supply shocks and oil-specific demand shocks are not statistically significant for most variables. Our results provide important insights into the appropriate exchange rate policy in emerging market economies.