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Are the Commodity Currencies an Exception to the Rule?

Author

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  • Yu-chin Chen

    (University of Washington)

  • Kenneth Rogoff

    (Harvard University)

Abstract

This paper first confirms and extends findings in the previous literature that for major commodity exporters with market-based exchange rates, the world price of their primary commodity exports is an important and robust determinant for their real exchange rate values. However, despite inducing strong contemporaneous currency responses, commodity prices tell us little about subsequent exchange rate movements a quarter ahead. To further investigate real exchange rate predictability, we use Bayesian model averaging and least angle regression as mechanisms to address model uncertainty and select predictors. We show that while various combinations of macroeconomic fundamentals – including commodity prices at times – can help predict quarterly exchange rate changes, no single specification emerges as the clear winner across both countries and time periods.

Suggested Citation

  • Yu-chin Chen & Kenneth Rogoff, 2006. "Are the Commodity Currencies an Exception to the Rule?," Working Papers UWEC-2006-28, University of Washington, Department of Economics, revised Mar 2012.
  • Handle: RePEc:udb:wpaper:uwec-2006-28
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    References listed on IDEAS

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    Cited by:

    1. Dongwon Lee & Yu-chin Chen, 2014. "What Makes a Commodity Currency?," Working Papers 201420, University of California at Riverside, Department of Economics.
    2. Leung, Charles Ka Yui & Shi, Song & Ho Tang, Edward Chi, 2013. "Commodity house prices," Regional Science and Urban Economics, Elsevier, vol. 43(6), pages 875-887.
    3. Chen, Yu-chin & Lee, Dongwon, 2018. "Market power, inflation targeting, and commodity currencies," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 122-139.

    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications

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