The commodity price and exchange rate dynamics
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Date
2/10/2017
DOI
Open Access Location
Journal Title
Journal ISSN
Volume Title
Publisher
Scientific Research Publishing
Rights
Abstract
This paper investigates the dynamic relationship between the commodity
price and the exchange rate in Australia and New Zealand. We focus on Australia
and New Zealand. Not only do their primary commodities account for
significant shares of their exports, but also their currencies share some distinctive
characteristics that are unique from other commodity currencies. Using
country-specific commodity price indices, we examine the relationship
between the departure of currency value from its fair value and fundamental
macroeconomic variables. Evidence of a strong and robust relationship between
the exchange rate and the commodity price has been found. Results indicate
that the commodity price can be used to improve the forecast ability of
the future exchange rate. Our commodity-price-augmented exchange rate forecasting
model consistently outperforms the random-walk model, for both
in-sample and out-of-sample forecasting. These results shed some extra lights
on policymaking for countries that rely on primary commodity production,
and attempt to move towards floating exchange rate regimes as part of their
global market liberalization process
Description
Keywords
Exchange rate, Commodity Price, Forecasting
Citation
Theoretical Economics Letters, 2017, 7 (6), pp. 1 - 24