Research Insights: Do Primary Commodity Prices Account for the Fluctuations of Exchange Rates?

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Peer Reviewed icon Peer Reviewed
Author
Date issued
Dec 2022
Subject
Exchange Rate;
Commodity Price;
Public Policy;
Raw Material;
Economy;
Petroleum
JEL code
F31 - Foreign Exchange;
F41 - Open Economy Macroeconomics
Category
Catalogs and Brochures
We explicitly derive a relationship between bilateral real exchange rates and primary commodity prices in a model that highlights the role of heterogeneity in production structures across countries. Fluctuations of just a few primary commodity prices account for between one third and one half of the volatility of the bilateral exchange rates of the United States against Germany, Japan, and the United Kingdom. Once we calibrate our quantitative model with data from input-output matrices and shocks to generate the observed commodity price fluctuations, our model delivers the same volatility and persistence of real exchange rates as in the data.