Iron ore price and the AUD exchange rate: A Markov approach

Clemence Gomwe and Ying Li

The Journal of International Trade & Economic Development, 2020, vol. 29, issue 2, 147-162

Abstract: The present paper fitted the monthly data set into the Markov regime switching model to examine the relationship between the iron ore price and the Australian dollar (AUD) exchange rate. The study dichotomised the AUD into state 1 (depreciation) and state 2 (appreciation). The empirical results indicate evidence of an asymmetric relationship between an iron ore price change and the AUD exchange rate fluctuation based on states. The AUD appreciates with a fall in iron price and depreciates with a rise in iron ore price. The results contradict with the understanding of the commodity-currency theory. Additionally, iron ore price reduces the AUD state expected duration and the switching probability, but increases the AUD volatility. Based on the transition probability, the AUD has a higher chance of depreciating than appreciating. The statistical economic impact of the AUD currency is higher when appreciating than depreciating.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:taf:jitecd:v:29:y:2020:i:2:p:147-162

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DOI: 10.1080/09638199.2019.1655087

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