The Norwegian Krone and Brent Crude Oil: Determinants & Behavior During Oil Price Shocks

Abstract

In this thesis, we investigate how a change in the oil price affects the Norwegian krone,using the interest rate differentials, the lagged real exchange rate, and the US dolla ras control variables. The Norwegian krone is measured against the euro, Great British pound, and the US dollar, and is based on two separate datasets, one monthly and one weekly, from April 2001 to December 2017.We further split the dataset into two sub-samples, where we investigate whether the dynamics of our independent variables change during the financial crisis in 2008, and the oil price crisis in 2014. The empirical analysis of the relationship between the Norwegian krone and the oil price is implemented using OLS regressions and Engle-Granger Co-integration.From the Engle-Granger Co-integration test, we do not find any co-integrated relation-ship between the NOK-exchange rates and the oil price. This is neither found for any of our independent variables. Therefore, we proceed by estimating an OLS regressions based on the concepts represented in the Augmented Dickey Fuller test. From the full dataset, we find both the oil price and the interest rate differential to be important determinants for the Norwegian krone. These results are robust for changes in the US dollar.The analysis of the sub-samples reveals that changes in the oil price were relatively more important during the financial crisis, while changes in the interest rate differential were relatively more important during the oil price crisis. Additionally, we find that the relationship between the oil price and the exchange rates is not driven by abnormally large changes in the oil price. This emphasizes that there is a general relationship between the oil price and the Norwegian krone