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Commodity Currencies And Monetary Policy

Author

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  • Michael B. Devereux

    (University of British Columbia)

  • Gregor W. Smith

Abstract

Countries that specialize in commodity exports often exhibit a correlation between the relevant commodity price and the value of their currency. We explore a natural but little-studied explanation for this correlation. An increase in the commodity price leads to increases in the future values of the international differential in policy interest rates. The tightening of expected future monetary policy relative to the US then leads to an immediate appreciation. We show theoretically that this correlation depends on the stance of monetary policy. We then derive a statistical model that embodies this mechanism and test the over-identifying restrictions for Australia, Canada, and New Zealand. For all three countries, controlling for the effect of commodity prices in predicting current and future monetary policy leaves them no significant, remaining role in statistically explaining exchange rates.

Suggested Citation

  • Michael B. Devereux & Gregor W. Smith, 2018. "Commodity Currencies And Monetary Policy," Working Paper 1408, Economics Department, Queen's University.
  • Handle: RePEc:qed:wpaper:1408
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    1. Michael B. Devereux & Gregor W. Smith, 2021. "Testing the Present‐Value Model of the Exchange Rate with Commodity Currencies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(2-3), pages 589-596, March.

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    More about this item

    Keywords

    monetary policy; commodity currency; exchange rate;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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