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The commodity-currency view of the Australian dollar: A multivariate cointegration approach

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Abstract

Using Australian quarterly data from the post-float period 1984:1-2003:1 and a partial system, we identify and estimate two cointegrating relations, one for the interest-rate differential and the other for the nominal exchange rate. Our estimate of the long-run elasticity of the exchange rate with respect to commodity prices is 0.939, which strongly supports the widely held view that the floating Australian dollar is a ‘commodity currency’. We also find that the PPP and UIP cannot be rejected so long as commodity prices are included in the cointegrating relations. Our model outperforms the random walk model in forecasting the exchange rate in the medium run.

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Article provided by Universidad del CEMA in its journal Journal of Applied Economics.

Volume (Year): VIII (2005)
Issue (Month): (May)
Pages: 81-99

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Handle: RePEc:cem:jaecon:v:8:y:2005:n:1:p:81-99

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Keywords: Australian dollar; commodity currency; cointegration;

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Cited by:
  1. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2012. "Purchasing Power Parity between the UK and the Euro Area," Working papers 2012-46, University of Connecticut, Department of Economics.
  2. Sanidas, Elias, 2005. "The Australian Dollar's Long-Term Fluctuations and Trend: The Commodity Prices-cum-Economic Cycles Hypothesis," Economics Working Papers wp05-29, School of Economics, University of Wollongong, NSW, Australia.

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