Research Insights: Do Primary Commodity Prices Account for the Fluctuations of Exchange Rates?
We explicitly derive a relationship between bilateral real exchange rates and primary commodity prices in a model that highlights the role of heterogeneity in production structures across countries. Fluctuations of just a few primary commodity prices account for between one third and one half of the volatility of the bilateral exchange rates of the United States against Germany, Japan, and the United Kingdom. Once we calibrate our quantitative model with data from input-output matrices and shocks to generate the observed commodity price fluctuations, our model delivers the same volatility and persistence of real exchange rates as in the data.
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| Language: | English |
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Inter-American Development Bank
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| Subjects: | Exchange Rate, Commodity Price, Public Policy, Raw Material, Economy, Petroleum, F31 - Foreign Exchange, F41 - Open Economy Macroeconomics, Primary commodity prices;Real exchange rate disconnect puzzle, |
| Online Access: | http://dx.doi.org/10.18235/0004605 https://publications.iadb.org/en/research-insights-do-primary-commodity-prices-account-fluctuations-exchange-rates |
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