Commodity Currencies and Empirical Exchange Rate Puzzles

IMF Working Papers, February 1, 2002

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Re-examines empirical exchange rate puzzles by focusing on three OECD economies (Australia, Canada, and New Zealand) where primary commodities constitute a significant share of their exports.
For Australia and New Zealand especially, the U.S. dollar price of their commodity exports (generally exogenous to these small economies) has a strong and stable influence on their floating real exchange rates.
The quantitative magnitude of the effects for Australia and New Zealand is consistent with predictions of standard theoretical models.
After controlling for commodity price shocks, a Purchasing Power Parity (PPP) puzzle remains in the residual.

Focused on three OECD commodity-exporting economies: Australia, Canada, and New Zealand.
Emphasizes the role of the U.S. dollar price of commodity exports as an exogenous driver for small open commodity economies with floating real rates.
Results are highlighted as relevant to many developing country commodity exporters as they liberalize their capital markets and move towards floating exchange rates.

Commodity price shocks materially affect floating real exchange rates in commodity-exporting small economies, particularly Australia and New Zealand.
Controlling for commodity price shocks reduces—but does not eliminate—the PPP puzzle, indicating additional factors influence real exchange rate behavior beyond commodity price movements.
The observed quantitative alignment with standard theoretical models supports the use of such models in analyzing commodity currency dynamics for small open economies.

Findings are relevant for policy-makers in commodity-exporting developing countries undergoing capital account liberalization and transitioning to floating exchange rates.
Policy consideration should account for the strong and stable influence of world (U.S. dollar) commodity prices on real exchange rates when designing macroeconomic and exchange rate frameworks.
Because a residual PPP puzzle persists after accounting for commodity price shocks, policy frameworks should also address other structural or external factors that can influence real exchange rates.

Subjects: Commodity prices, Currencies, Exchange rates, Foreign exchange, International trade, Money, Prices, Real exchange rates, Terms of trade.
Keywords: Australia and New Zealand, Canadian dollar, capital flows, commodity, commodity currency, commodity economy, commodity export, commodity price, commodity price movement, commodity price stocks, Commodity prices, Currencies, elasticity estimate, exchange rate, Exchange rates, Global, price data, productivity-augmented equation, real commodity price, Real exchange rates, responses to world commodity price shock, Terms of trade, world commodity price series, WP.

IMF Working Paper by Kenneth Rogoff and Yu-chin Chen, February 1, 2002.