The paper presents a two-country model of joint exchange rate and commodity price determination to examine the implications of non-zero correlations between these prices for received theory. The correlation with the exchange rate arises from the common practice to quote commodity prices in consuming countries' currency that subjects producing countries to the exchange risk. It appears crucial for the price response of commodity markets to shocks. Welfare results of commodity price stabilization are obtained and used to support the position taken by industrialized countries that have long opposed international commodity agreements. Estimates of international correlations are used to test the hypotheses of the model and to uncover the pricing policies of producing countries.
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