The commodity currency puzzle

Hilde C. Bjørnland and Håvard Hungnes ()
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Hilde C. Bjørnland and Håvard Hungnes: Statistics Norway, http://www.ssb.no/english/research/
Authors registered in the RePEc Author Service: Hilde Christiane Bjørnland () and Håvard Hungnes

Discussion Papers from Research Department of Statistics Norway

Abstract: 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.

Keywords: Exchange rate; commodity currencies; real oil price; purchasing power parity; uncovered interest parity. (search for similar items in EconPapers)
JEL-codes: C32 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: Written
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Related works:
Working Paper: The commodity currency puzzle (2005)
Journal Article: The Commodity Currency Puzzle (2008)
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Persistent link: http://EconPapers.repec.org/RePEc:ssb:dispap:423

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