Impact of oil price on Azerbaijan economy: Relationship between oil prices, real effective exchange rates and real GDP

This paper analyzes the relationship between oil prices, real effective exchange rate, and real GDP in case of Azerbaijan economy. By using quarterly data from 2001Q1 to 2020Q1, we apply Vector Auto Regression (VAR) model. Our main findings indicate the existence of Granger causality between oil prices and GDP. In addition, by showing that shock to oil price causes 72% variations of fluctuations in real effective exchange rates, we also confirm that the Azerbaijan economy can be considered as experiencing Dutch Diseases. Even though our results illustrate the positive impact of a shock to the oil prices on GDP in the short run, in prolonged time it turns out to be negative.