U.S. Dollar Exchange Rates-Macroeconomics

Question

select any scientific paper on Macroeconomics topic and write a pro and con/critique. include introduction, background, body, recommendations and conclusion.

Sample paper

Macroeconomics: U.S. Dollar Exchange Rates

Lizardo, R. A., & Mollick, A. V. (2010). Oil price fluctuations and U.S. dollar exchange rates. Energy Economics, 32(2), 399-408. doi:10.1016/j.eneco.2009.10.005

The article by Lizardo and Mollick (2010) seeks to examine the relationship between oil price fluctuations and the United States dollar exchange rates. In particular, the authors evaluate whether fluctuations in oil prices influence the value of the United States dollar (USD) relative to other major world currencies. The authors examined the relationship between oil prices and the U.S. dollar from the period between the 1970s and 2008. The authors adopt a quantitative methodology in evaluating the relationship between oil prices and the value of the U.S. dollar. By relying on an empirical approach, the authors are able to determine the various factors that influence the domestic demand for money such as real income, interest rates, and price levels. This paper is a critical analysis of the article by Lizardo and Mollick, which analyzes the relationship between oil prices and the value of the U.S. dollar.

Background

Lizardo and Mollick (2010) assert that the value of the U.S. dollar has significantly declined since it last peaked at the beginning of the century. Between 2001 and 2007, the U.S. dollar lost significant value against major currencies in the world. The dollar lost 15 percent against the Japanese Yen, 41 percent against the Pound, 37 percent against the Canadian Dollar, and 65 percent against the Euro. In addition, the U.S. dollar lost value against the Trade Weighted Major Currencies Exchange Index within the same period (Lizardo and Mollick, 2010). The constant loss of value signifies a worrying trend as it could have dire financial consequences to the United States. For instance, currency depreciation makes imports become expensive. This signifies a rise in the price of imported goods. Another possible consequence is inflation in the economy due to various factors, including aggregate demand increases.

Persistent trade deficits have characterized the U.S. economy since the early 1990s. Trade deficits have negative impacts on the economy. One of the drivers of the trade deficits is the ever-rising demand for oil and the consequent high importation of the precious commodity. Since 1985, the U.S. has significantly increased its share of oil imports leading to a deteriorating balance of trade (Lizardo & Mollick, 2010). Oil is a key driver of the U.S. economy. This is because the U.S. heavily depends on oil for its manufacturing sector. As such, constant oil price fluctuations have a serious impact to the U.S. economy. High price increases may hurt the U.S. economy and lead to a loss of value of the U.S. dollar against other major world currencies.

Oil prices represent an exogenous factor that may significantly influence the strength of the U.S. dollar. As the oil-producing nations become wealthier, the U.S. must continue to spend increasing sums of money to purchase oil and other commodities. Lizardo and Mollick (2010) propound the idea that the depreciation of the U.S. dollar against the major currencies may be the result of the demand and supply forces: with increasing supply of the U.S. dollar, the price of the U.S. dollar falls. This leads to a situation whereby the country increasingly needs a larger sum of dollars to buy the same volume of oil like in the previous period. The evaluation of available literature by Lizardo and Mollick (2010) indicates that oil prices produce both inflationary and real effects to the economy of the country. The literature also indicates that sharp oil increases precipitate periods of inflation to the U.S. economy.

Body

Data Sources

The data applied in the study consist of observations of the net money supply in the country, general oil prices, and the nominal exchange rate. In the study, Lizardo and Mollick (2010) obtained nominal exchange rate data from the International Monetary Fund (IMF). The IMF provides accurate statistical data about various commodities, price levels, and the economy in general. Data on money supply and industrial production levels was drawn from the Economic Cooperation and Development (OECD) database. OECD database is a reliable source of data on various macroeconomic parameters. Data on the Consumer Price Index and the nominal oil price was drawn from the Federal Reserve Bank in Saint Louis. This is also a highly reliable source of accurate data on various macroeconomic parameters. The authors utilized data from various countries including Denmark, Japan, Norway, Mexico, Canada, and among others. The selection criteria included oil exporting countries and those that were active trade partners with the United States.

Methodology

The authors adopted an empirical approach in examining how price fluctuations influence the value of the U.S. dollar. In particular, the authors apply the observation method in evaluating country-specific data on oil price fluctuations and currency exchange changes. Through application of empirical analysis, Lizardo and Mollick (2010) go beyond the mere reporting of observations. Empirical analysis promotes the readers’ understanding of the relationship between oil price fluctuations and changes in the currency exchange rates. The empirical method is suitable because it allows the researchers to respond to a dynamic range of situations in the field (Weibelzahl & Weber, 2002). It provides the researchers with the opportunity to meet professional research standards. Since this approach involves the analysis of macroeconomic variables using data from reputable databases, the internal validity of the results will likely be high.

The empirical approach is not without some challenges. One of the key challenges in adopting the empirical approach is the reliability of the external data (Weibelzahl & Weber, 2002). Unreliable data sources may comprise the entire research, leading to biased or erroneous output. By relying on external data sources, there is always the risk about the accuracy and reliability of such data. Lizardo and Mollick (2010) minimize on the risk of external data by utilizing reputable databases. The researchers also utilize three databases for information. This eliminates the risk involved in using data from a single exclusive source. Another limitation of the research in applying the empirical approach is the presence of errors that may emanate from the layered analytical approach. Lizardo and Mollick (2010) avoid the error by conducting a detailed empirical analysis.

There are also some inherent problems relating to empirical research. One of the inherent issues is that empirical research fails to offer formal way of proving facts; rather, it provides the researchers a way of proving the hypothesis. Empirical studies cannot lead to development of new theoretical perspectives. Lizardo and Mollick (2010) apply theoretical backings in order to develop new theories. The limitations evident in the study are minor and may not affect the study findings in a fundamental way. This is true especially considering that the researchers utilized high quality sources for empirical data in order to minimize data validity issues. The study adheres to the ethical guidelines regulating the conduct of researchers while carrying out research.

Findings

Lizardo and Mollick (2010) found a strong correlation between oil price fluctuations and the value of the U.S. dollar. The researchers apply the U.S. dollar exchange rates as the dependent variables with regard to other major currencies. The findings indicate that there is a strong relationship between the U.S. nominal exchange rate and oil prices. An increase in the price of oil has a significant effect in the value of the U.S. dollar, specifically a depreciation effect or loss of value compared with the exporting country. As such, an increase in oil prices leads to depreciation of the U.S. dollar relative to the exporting country. This phenomenon is not limited to the U.S. dollar. The study indicates that the currencies of other oil importing countries such as Japan, Denmark, and Sweden experience depreciation when oil prices increase. This confirms that currency depreciation due to a rise in real oil prices is not limited to the U.S. dollar but other major currencies as well.

It is worth noting that there are certain outside factors that could have a significant impact on the findings of the study. The level of money supply in the economy and the overall output levels in the economy may significantly affect the value of the U.S. dollar. Lizardo and Mollick (2010) control for money supply levels and output levels in conducting the research. This gives a more accurate account of the influence of oil price fluctuations on the value of the U.S. dollar. The researchers, however, fail to account for interest rates, which may have an effect in the U.S. dollar value. Higher interest rates usually lead to a higher demand for a particular currency, increasing its value. The results of the study are generalizable to other countries and within a similar situation. Increases in oil prices will generally lead to a depreciation of the importing country’s currency. On the other hand, the exporting country experiences a deterioration in its currency.

Recommendations

Few studies explore the relationship between the value of the U.S. dollar and the changes in oil prices. The study by Lizardo and Mollick (2010) finds a strong link between an increase in oil prices and the devaluation of the U.S. dollar. There is need for further studies in the area to explain the link between the two factors. Although the study controls for various factors including money supply and output levels in the country, there is a total disregard of the role played by interest rates in determining the value of the U.S. dollar. There is need for further research in this field to determine whether interest rates have significant effects on the value of the U.S. dollar as compared to oil price fluctuations.

Conclusion

In summary, the article by Lizardo and Mollick (2010) evaluates the link between high oil prices and depreciation of the U.S. dollar relative to other major currencies. The researchers apply an empirical approach to evaluate the nature of the relationship. This approach enables the authors to go beyond the mere reporting of observations. On the other hand, the empirical approach does not support the development of new theory. The authors utilize high quality sources for the data. This increases the validity of the data since it is drawn from reputable sources. This study is significant to the understanding of the impact of high oil prices to the economy.

References

Lizardo, R. A., & Mollick, A. V. (2010). Oil price fluctuations and U.S. dollar exchange rates.     Energy Economics, 32(2), 399-408. doi:10.1016/j.eneco.2009.10.005

Weibelzahl, S. & Weber, G. (2002). Advantages, Opportunities, and Limits of Empirical Evaluations: Evaluating Adaptive Systems. Research Gate.

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