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Real Exchange Rates and Commodity Prices

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  • Dominique Yves Dupont
  • Mr. V. Hugo Juan-Ramon

Abstract

This paper examines the relations between fluctuations in real exchange rates among the major currencies and fluctuations in real commodity prices. Increased exchange rate volatility calls for a better understanding of these relations. To the best of our knowledge, no systematic study of those effects has been performed on a wide range of commodities, although Sjaastad and Scacciavillani (1993) have done so for gold. We build on their approach and construct a supply and demand multi-country model, with world market clearing, which incorporates speculative and non-speculative demands for inventories and “static” and “rational” expectations. We estimate the model using several econometric methods on monthly data from January 1972 to January 1992 for 65 commodity prices. The paper finds that, for a small group of commodities, the dollar-denominated price is significantly influenced by the deutsche mark and the yen. The empirical results show that geographical proximity matters, and that supply and demand elasticities are important in determining the commodity price in world markets above and beyond the size of the share of those commodities in world trade.

Suggested Citation

  • Dominique Yves Dupont & Mr. V. Hugo Juan-Ramon, 1996. "Real Exchange Rates and Commodity Prices," IMF Working Papers 1996/027, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:1996/027
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    References listed on IDEAS

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    1. Carmen M. Reinhart & Peter Wickham, 1994. "Commodity Prices: Cyclical Weakness or Secular Decline?," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 175-213, June.
    2. Angus Deaton & Guy Laroque, 1992. "On the Behaviour of Commodity Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 1-23.
    3. Pindyck, Robert S & Rotemberg, Julio J, 1990. "The Excess Co-movement of Commodity Prices," Economic Journal, Royal Economic Society, vol. 100(403), pages 1173-1189, December.
    4. Rudiger Dornbusch, 1985. "Policy and Performance Links between LDC Debtors and Industrial Nations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 16(2), pages 303-368.
    5. Eduardo Borensztein & Carmen M. Reinhart, 1994. "The Macroeconomic Determinants of Commodity Prices," IMF Staff Papers, Palgrave Macmillan, vol. 41(2), pages 236-261, June.
    6. Guilkey, David K. & Schmidt, Peter, 1989. "Extended tabulations for Dickey-Fuller tests," Economics Letters, Elsevier, vol. 31(4), pages 355-357, December.
    7. Gilbert, Christopher L, 1989. "The Impact of Exchange Rates and Developing Country Debt on Commodity Prices," Economic Journal, Royal Economic Society, vol. 99(397), pages 773-784, September.
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    Cited by:

    1. Jaime Guajardo & Guillermo Le Fort, 1999. "Cuenta Corriente y Desvíos Transitorios en Términos de Intercambio y Volúmenes de Exportaciones: Chile 1985-1999," Working Papers Central Bank of Chile 49, Central Bank of Chile.
    2. McCauley, R.N., 1997. "The Euro and the Dollar," Princeton Essays in International Economics 205, International Economics Section, Departement of Economics Princeton University,.
    3. Adusei Jumah, 2001. "The effects of dollar-sterling exchange rate volatility on futures markets for coffee and cocoa," European Review of Agricultural Economics, Oxford University Press and the European Agricultural and Applied Economics Publications Foundation, vol. 28(3), pages 307-328, October.
    4. Robert McCauley, 1999. "The Euro and the Dollar, 1998," Open Economies Review, Springer, vol. 10(1), pages 91-133, February.

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