Is the Norwegian Krone exchange rate a commodity currency?

Abstract

This study examines the validity of the view that Norway Krone is a commodity currency. Norway has a primary commodity (oil) that constitutes the majority of exports. We describe models where Norwegian krone (NOK) to US dollar (US$) exchange rate is measured against the Brent oil price.

We found that exchange rates, nominal and real are cointegrated with the Brent oil price. The long-run relationship seems to be robust. Moreover, the fact that the elasticity of Brent oil price is statistically significant confirms that Norwegian krone is a commodity currency or a petrocurrency according to literature studies. A Vector Error Correction Model analysis also identifies that oil price will affect the exchange rate. Through the latter, we can now see how VECM ties short-run dynamics to long-run relations via the error correction term