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Commodity Currencies and Empirical Exchange Rate Puzzles

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  • Y.Chen
  • K. Rogoff

Abstract

This paper re-examines empirical exchange rate puzzles by focusing on three OECD economies (Australia, Canada, and New Zealand) where primary commodities constitute a significant share of their exports. For Australia and New Zealand especially, we find that the U.S. dollar price of their commodity exports (generally exogenous to these small economies) - has a strong and stable influence on their floating real rates, with the quantitative magnitude of the effects consistent with predictions of standard theoretical models. However, after controlling for commodity price shocks, there is still a PPP puzzle in the residual. Nevertheless, the results here are relevant to many developing country commodity exporters, as they liberalize their capital markets and move towards floating exchange rates.

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File URL: http://www.dnb.nl/binaries/sr076_tcm46-146853.pdf
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Bibliographic Info

Paper provided by Netherlands Central Bank in its series DNB Staff Reports (discontinued) with number 76.

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Length: 52 pages
Date of creation: 2003
Date of revision:
Handle: RePEc:dnb:staffs:76

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Keywords: Exchange Rates; Commodity Prices; Purchasing Power Parity;

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