Commodity Currencies And Monetary Policy

Michael Devereux and Gregor Smith

No 1408, Working Paper from Economics Department, Queen's University

Abstract: Countries that specialize in commodity exports often exhibit a correlation between the relevant commodity price and the value of their currency. We explore a natural but little-studied explanation for this correlation. An increase in the commodity price leads to increases in the future values of the international differential in policy interest rates. The tightening of expected future monetary policy relative to the US then leads to an immediate appreciation. We show theoretically that this correlation depends on the stance of monetary policy. We then derive a statistical model that embodies this mechanism and test the over-identifying restrictions for Australia, Canada, and New Zealand. For all three countries, controlling for the effect of commodity prices in predicting current and future monetary policy leaves them no significant, remaining role in statistically explaining exchange rates.

Keywords: monetary policy; commodity currency; exchange rate (search for similar items in EconPapers)
JEL-codes: E52 F31 F41 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2018-08
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Commodity Currencies and Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:qed:wpaper:1408

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