Testing the Present‐Value Model of the Exchange Rate with Commodity Currencies

Michael Devereux and Gregor Smith

Journal of Money, Credit and Banking, 2021, vol. 53, issue 2-3, 589-596

Abstract: Countries that specialize in commodity exports often exhibit a correlation between the relevant commodity price and the value of their currency. We explore an explanation for this correlation based on the present‐value, monetary model of the exchange rate. An increase in the commodity price leads to an increase in the expected, future policy interest rate and so to an immediate appreciation. We test the model's over‐identifying restrictions for Canada, Australia, and New Zealand. There, controlling for the effect of commodity prices in predicting current and future monetary policy leaves those prices no significant, remaining role in statistically explaining exchange rates.

Date: 2021
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https://doi.org/10.1111/jmcb.12774

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:53:y:2021:i:2-3:p:589-596

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