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The commodity currency puzzle

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This paper addresses the purchasing power parity (PPP) puzzle for commodity currencies. A substantial part of the literature on commodity currencies has found that, despite controlling for the effect of commodity prices, PPP does not hold in the long run. We show that once we also control for the effect of the interest rate differential in the real exchange rate relationship, the discrepancies from PPP are fully accounted for. The analysis is applied to the real exchange rate behaviour in Norway, which has a primary commodity (oil) that constitutes the majority of its exports. We show that with the interest rate differential included in the long run real exchange rate relationship, the real oil price plays a minor role. Adjustment to equilibrium (half-lives) is also substantially reduced, taking no more than one year on average. Hence, contrary to earlier findings on commodity currencies, we have effectively removed the PPP puzzle.

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  • Hilde C. Bjørnland & Håvard Hungnes, 2005. "The commodity currency puzzle," Discussion Papers 423, Statistics Norway, Research Department.
  • Handle: RePEc:ssb:dispap:423
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    Cited by:

    1. Dewenter, Ralf & Dulleck, Uwe & Thomas, Tobias, 2016. "Does the 4th estate deliver? Towards more direct measure of political media bias," Working Paper 175/2016, Helmut Schmidt University, Hamburg.
    2. repec:kap:iaecre:v:18:y:2012:i:3:p:299-314 is not listed on IDEAS
    3. Stephanos Papadamou & Thomas Markopoulos, 2012. "The Monetary Approach to the Exchange Rate Determination for a “Petrocurrency”: The Case of Norwegian Krone," International Advances in Economic Research, Springer;International Atlantic Economic Society, pages 299-314.
    4. Lambelet, Jean-Christian & Mihailov, Alexander, 2005. "The Triple-Parity Law," Economics Discussion Papers 8896, University of Essex, Department of Economics.
    5. Chen, Hongtao & Liu, Li & Wang, Yudong & Zhu, Yingming, 2016. "Oil price shocks and U.S. dollar exchange rates," Energy, Elsevier, vol. 112(C), pages 1036-1048.
    6. Tayfur Bayat & Saban Nazlioglu & Selim Kayhan, 2015. "Exchange Rate and Oil Price Interactions in Transition Economies: Czech Republic, Hungary and Poland," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(3), pages 267-285, June.
    7. Geir E. Alstad, 2010. "The long-run exchange rate for NOK: a BEER approach," Working Paper 2010/19, Norges Bank.

    More about this item

    Keywords

    Exchange rate; commodity currencies; real oil price; purchasing power parity; uncovered interest parity.;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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