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Terms of Trade and Exchange Rates: a Relationship Complicated by Anchor Policies

Author

Listed:
  • Virginie Coudert
  • Cécile Couharde
  • Valérie Mignon

Abstract

The terms of trade of commodity-exporting countries are directly affected by the large-scale swings of worldwide prices. These terms of trade represent one of the key determinants of the real exchange rates of these economies. By estimating long-term equilibrium exchange rates we can gauge their impact for oil exporters and for exporters of other commodities. We then evaluate currency ‘misalignments' as the discrepancies between the observed real exchange rates and their equilibrium values. Can these misalignments themselves be explained? In countries whose currencies are anchored to the dollar or to the euro, the misalignments are shown to depend on the behaviour of the anchor currency. When the anchor currency appreciates, the anchored currencies tend to be overvalued; when it depreciates, their undervaluation is likely.

Suggested Citation

  • Virginie Coudert & Cécile Couharde & Valérie Mignon, 2009. "Terms of Trade and Exchange Rates: a Relationship Complicated by Anchor Policies," La Lettre du CEPII, CEPII research center, issue 285.
  • Handle: RePEc:cii:cepill:2009-285
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    More about this item

    Keywords

    EXCHANGE RATE; INTERNATIONAL TRADE; EXCHANGE RATE POLICY;

    JEL classification:

    • F10 - International Economics - - Trade - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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