An investigative Cross-Country examination of the relationship between Commodities and Exchange Rates.
Introduction and Theory
An investigative Cross-Country examination of the relationship between Commodities and Exchange Rates.
The theoretical topic to be addressed will be to investigate the relationship between the fundamentals of exchange rates and commodities. In order to further current research, a variety of commodity and non- commodity currencies will be assessed. There will also be attempts to discern reasoning for the empirical results; relating to real life evidence such as compositions of countries resources, policies and political changes. Moreover, this will linked to the recent growth in commodity derivatives and the rapid globalisation which we are now experiencing.
The connection between economic fundamentals and exchange rate behaviour has been one of the most controversial issues in Economics and Finance. Meese and Rogoff (1983)1 pertained that structural models of exchange rates are indifferent to a typical “random walk” model for duration of up to a year.
Exchange rates have a massive influence on the price of traded products. Theoretically, exchange rate responses to terms-of-trade shocks can operate via the “income effect” of Dornbusch (1976)2; whereby exchange rate volatility in the short run is greater due to its compensating elements for sticky prices. Additional, the Balassa-Samuelson effect emphasizes that the nominal exchange rate will incorporate expectations of future commodity price increases; if costs of adjustment in moving factors exist. 3
Current results corroborate the notion that commodity currencies are privileged s in terms of their predictive power, though it appears inconclusive overall.4 In particular for developing countries, forecasting commodity prices is important for planning production, export activity and for poverty alleviation. A better understanding of the issue is especially important because of its impact on uncertainty in export revenues. Due to the risk of macroeconomic mismanagement in the face
An investigative Cross-Country examination of the relationship between Commodities and Exchange Rates.
The theoretical topic to be addressed will be to investigate the relationship between the fundamentals of exchange rates and commodities. In order to further current research, a variety of commodity and non- commodity currencies will be assessed. There will also be attempts to discern reasoning for the empirical results; relating to real life evidence such as compositions of countries resources, policies and political changes. Moreover, this will linked to the recent growth in commodity derivatives and the rapid globalisation which we are now experiencing.
The connection between economic fundamentals and exchange rate behaviour has been one of the most controversial issues in Economics and Finance. Meese and Rogoff (1983)1 pertained that structural models of exchange rates are indifferent to a typical “random walk” model for duration of up to a year.
Exchange rates have a massive influence on the price of traded products. Theoretically, exchange rate responses to terms-of-trade shocks can operate via the “income effect” of Dornbusch (1976)2; whereby exchange rate volatility in the short run is greater due to its compensating elements for sticky prices. Additional, the Balassa-Samuelson effect emphasizes that the nominal exchange rate will incorporate expectations of future commodity price increases; if costs of adjustment in moving factors exist. 3
Current results corroborate the notion that commodity currencies are privileged s in terms of their predictive power, though it appears inconclusive overall.4 In particular for developing countries, forecasting commodity prices is important for planning production, export activity and for poverty alleviation. A better understanding of the issue is especially important because of its impact on uncertainty in export revenues. Due to the risk of macroeconomic mismanagement in the face