Predicting United Arab Emirates' Real Effective Exchange Rates Using Oil Prices

Abstract

We examine whether oil prices help produce accurate forecasts of the real broad effective exchange rate of the United Arab Emirates (UAE). Using monthly data for 1994–1999, we formulate a univariate moving average (MA) and an augmented moving average (A‐MA) model to generate multi‐period forecasts of UAE real exchange rates for 2000–2019. The MA model utilises past information in real exchange rates, while the A‐MA model utilises past information in both real exchange rates and oil prices. Our results indicate that oil prices help produce accurate forecasts of UAE real exchange rates only for 2000–2009; that is, for this period, the A‐MA forecasts are unbiased, outperform the MA forecasts and are directionally accurate. As for 2009–2019, we take a non‐parametric approach and show that oil price changes accurately predict directional change in UAE real effective exchange rates.