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Real Exchange Rate and Commodity Prices in a Neoclassical Model

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  • Reinhart, Carmen

Abstract

This paper represents a neoclassical model that explains the observed empirical relationship between government spending and world commodity supplies and the real exchange rate and real commodity prices. It is shown that fiscal expansion and increasing world commodity supplies simultaneously lead to an appreciation of the real exchange rate and a decline in relative commodity prices. The structural model is estimated and its forecasting performance is compared to a variety of models. We find that theory and structure help in predicting commodity prices, although not the exchange rate, and that predictive ability increases as the forecast horizon is lengthened.

Suggested Citation

  • Reinhart, Carmen, 1988. "Real Exchange Rate and Commodity Prices in a Neoclassical Model," MPRA Paper 13188, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:13188
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    File URL: https://mpra.ub.uni-muenchen.de/13188/1/MPRA_paper_13188.pdf
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    References listed on IDEAS

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    4. Grilli, Enzo R & Yang, Maw Cheng, 1988. "Primary Commodity Prices, Manufactured Goods Prices, and the Terms of Trade of Developing Countries: What the Long Run Shows," World Bank Economic Review, World Bank Group, vol. 2(1), pages 1-47, January.
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    6. Jonathan D. Ostry & Carmen M. Reinhart, 1992. "Private Saving and Terms of Trade Shocks: Evidence from Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 495-517, September.
    7. Deaton, A.S., 1992. "Commodity Prices, Stabilization, and Growth in Africa," Papers 166, Princeton, Woodrow Wilson School - Development Studies.
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    10. Powell, Andrew, 1991. "Commodity and Developing Country Terms of Trade: What Does the Long Run Show?," Economic Journal, Royal Economic Society, vol. 101(409), pages 1485-1496, November.
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    13. Ke-Young Chu & Thomas K. Morrison, 1986. "World Non-Oil Primary Commodity Markets: A Medium-Term Framework of Analysis (Marchés internationaux de produits primaires non pétroliers: cadre d'analyse à moyen terme) (Mercados mundiales de produ," IMF Staff Papers, Palgrave Macmillan, vol. 33(1), pages 139-184, March.
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    Cited by:

    1. Jan J. J. Groen & Paolo A. Pesenti, 2011. "Commodity Prices, Commodity Currencies, and Global Economic Developments," NBER Chapters,in: Commodity Prices and Markets, East Asia Seminar on Economics, Volume 20, pages 15-42 National Bureau of Economic Research, Inc.
    2. Byrne, Joseph P. & Fazio, Giorgio & Fiess, Norbert, 2013. "Primary commodity prices: Co-movements, common factors and fundamentals," Journal of Development Economics, Elsevier, vol. 101(C), pages 16-26.
    3. Byrne, Joseph P & Fazio, Giorgio & Fiess, Norbert, 2010. "Optimism and commitment: An elementary theory of bargaining and war," SIRE Discussion Papers 2010-102, Scottish Institute for Research in Economics (SIRE).

    More about this item

    Keywords

    commodity price; fiscal policy; developing countries; real exchange rate;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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