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Can Exchange Rates Forecast Commodity Prices?

  • Kenneth Rogoff

    (Harvard University)

  • Barbara Rossi

    (Duke University)

  • Yu-chin Chen

    (University of Washington)

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. Our results are consistent with a present value relationship in which the exchange rate depends on a present value of fundamentals including, for a core group of commodity exporters, the world price of their commodity exports. Because global commodity prices are essentially exogenous to these countries, we are able to avoid the endogeneity pitfalls that plague most of the related exchange rate literature. More directly, the analysis suggests that where commodity price forward markets are thin or non-existent, exchange rate-based forecasts may be a viable alternative for predicting future price movements.

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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 540.

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Date of creation: 2008
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Handle: RePEc:red:sed008:540
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