The Impact of Oil Prices on the Real Exchange Rate of the Dirham: A Case Study of the United Arab Emirates (UAE)

Abstract

This study investigated the impact of oil shocks on the real exchange rate of the United Arab Emirates (UAE) dirham. Time series data were used for the period 1977–2007. Through this study, it has been found that a fixed exchange rate to the US dollar is not an appropriate exchange rate regime for the UAE. This is because when the price of oil increases, and with a fixed exchange rate regime, this would lead to rapid growth in gross domestic product and liquidity in the UAE economy. This, in turn, causes domestic prices to increase, and results in high levels of inflation.