The Volatility of the Relative Price of Commodities In Terms of Manufactures Across Exchange Regimes : A Theoretical Model

Author/Editor:

Hong Liang

Publication Date:

December 1, 1998

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper investigates the relationship between the nominal exchange rate regime and the volatility of relative commodity prices. The analysis shows that the relationship depends upon both the market structure and the economic agent’s perception about future exchange rate movements. When the markets for manufactured goods are less competitive than the markets for primary commodities, the volatility of relative commodity prices rises when exchange rate uncertainty increases. If demand for manufactured goods is intertemporally dependent, even a small increase in exchange rate uncertainty can result in potentially large costs in terms of increased relative commodity price instability.

Series:

Working Paper No. 98/163

English

Publication Date:

December 1, 1998

ISBN/ISSN:

9781451980639/1018-5941

Stock No:

WPIEA1631998

Format:

Paper

Pages:

21

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