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CAN EXCHANGE RATES FORECAST COMMODITY PRICES?

Yu-chin Chen (), Kenneth Rogoff and Barbara Rossi ()

No 08-03, Working Papers from Duke University, Department of Economics

Abstract: This paper studies the dynamic relationship between exchange rate fluctuations and world commodity price movements. Taking into account parameter instability, we demonstrate surprisingly robust evidence that exchange rates predict world commodity price movements, both in-sample and out-of-sample. Because commodity prices are exogenous to the exchange rates we consider, we are able to overcome the identification problems that plague the existing empirical exchange rate literature. Because our finding that exchange rates predict future commodity prices can be given a true causal interpretation, it provides the most concrete support yet for the importance of selected macroeconomic fundamentals in determining exchange rates. As an important by-product of our analysis, we show that exchange rate-based forecasts may be a viable alternative for predicting future commodity price movements.

Keywords: Exchange rates; forecasting; commodity prices; random walk (search for similar items in EconPapers)
JEL-codes: C52 C53 F31 F47 (search for similar items in EconPapers)
Pages: 44 Pages
Date: 2008
New Economics Papers: this item is included in nep-cba, nep-for, nep-ifn and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
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Related works:
Journal Article: Can Exchange Rates Forecast Commodity Prices? (2010) Downloads
Working Paper: Can Exchange Rates Forecast Commodity Prices? (2010) Downloads
Working Paper: Can Exchange Rates Forecast Commodity Prices? (2010) Downloads
Working Paper: Can Exchange Rates Forecast Commodity Prices? (2009) Downloads
Working Paper: Can Exchange Rates Forecast Commodity Prices? (2008) Downloads
Working Paper: Can Exchange Rates Forecast Commodity Prices? (2008) Downloads
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