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Oil imports represent a significant fraction of the trade balance for energy-dependant economies. In the case of small open economies with floating exchange rates, the variability in oil prices is expected to have a large impact on the relative value of the currency. Since oil contracts are denominated in US dollars, changes in the price of oil have significant implications for the demand and supply of foreign exchange. This relationship between the price of oil and the exchange rate has been established by the literature for oil-producing countries but not for oil-importing countries. This paper uses the case of the Dominican Republic, an energy-dependant small open economy with a floating exchange rate, to illustrate this connection.



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