Market power, inflation targeting, and commodity currencies

The ‘commodity currency’ literature highlights the robust exchange rate response to fluctuations in global commodity prices that occurs for major commodity exporters. The magnitude of the response, however, varies widely across countries and over time horizons. This paper examines the real exchange rates of 51 commodity exporters over the period from 1980 to 2010, and finds that in the long-run, a higher degree of market power in the world commodity trade can reduce the exchange rate response, while in the short-run, an inflation targeting regime can amplify it. These differential impacts across countries and horizons are of particular relevance for monetary policy-making and for trade strategy in commodity-abundant economies.