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Can Exchange Rates Forecast Commodity Prices?

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Author Info

  • Chen, Yu-chin
  • Rogoff, Kenneth
  • Rossi, Barbara

Abstract

This paper studies the dynamic relationship between exchange rate fluctuations and world commodity price movements. Taking into account parameter instability, we demonstrate surprisingly robust evidence that exchange rates predict world commodity price movements, both in-sample and out-of-sample. Because commodity prices are exogenous to the exchange rates we consider, we are able to overcome the identification problems that plague the existing empirical exchange rate literature. Because our finding that exchange rates predict future commodity prices can be given a true causal interpretation, it provides the most concrete support yet for the importance of selected macroeconomic fundamentals in determining exchange rates. As an important by-product of our analysis, we show that exchange rate-based forecasts may be a viable alternative for predicting future commodity price movements.

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Bibliographic Info

Paper provided by Duke University, Department of Economics in its series Working Papers with number 08-03.

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Length: 44 Pages
Date of creation: 2008
Date of revision:
Handle: RePEc:duk:dukeec:08-03

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Postal: Department of Economics Duke University 213 Social Sciences Building Box 90097 Durham, NC 27708-0097
Phone: (919) 660-1800
Fax: (919) 684-8974
Web page: http://econ.duke.edu/

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Keywords: Exchange rates; forecasting; commodity prices; random walk;

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References

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  34. repec:fth:harver:1435 is not listed on IDEAS
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