Commodity Currencies: A Macroeconomic Interpretation

Matt Polasek
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Matt Polasek: Flinders University, South Australia

Economic Analysis and Policy, 2004, vol. 34, issue 1, 63-78

Abstract: The paper investigates if there is a theoretical basis for the "commodity currency" phenomenon in small open economies exporting Okun's "auction goods" under short-term capacity constraints. It is shown under a variety of assumed conditions that commodity prices map into currency movements which are inline with those expected by the "commodity currency" hypothesis and that this holds irrespective of whether trade is initially balanced or not. The case of a "perfect" commodity currency may be said to arise where the domestic cost and price effects of fluctuating commodity prices are fully neutralised by the accompanying movements in nominal exchange rates. It is further shown that while the present regime of floating exchanges and high international capital mobility limits the scope in primary exporting countries for stimulating output and employment when commodity prices are high, the system is less prone to inflationary excesses than the previous regime of fixed or regulated exchange rates.

Keywords: Currencies; Currency; Open Economies; Trade (search for similar items in EconPapers)
JEL-codes: F31 F33 F41 O19 (search for similar items in EconPapers)
Date: 2004
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Citations: View citations in EconPapers (2)

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