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The Commodity-Currency View of the Australian Dollar: A Multivariate Cointegration Approach

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  • Dimitris Hatzinikolaou
  • Metodey Polasek

Abstract

Using Australian quarterly data from the post-float period 1984:1-2003:1 and a partial system, we identify and estimate two cointegrating relations, one for the interest-rate differential and the other for the nominal exchange rate. Our estimate of the long-run elasticity of the exchange rate with respect to commodity prices is 0.939, which strongly supports the widely held view that the floating Australian dollar is a ‘commodity currency’. We also find that the PPP and UIP cannot be rejected so long as commodity prices are included in the cointegrating relations. Our model outperforms the random walk model in forecasting the exchange rate in the medium run.

Suggested Citation

  • Dimitris Hatzinikolaou & Metodey Polasek, 2005. "The Commodity-Currency View of the Australian Dollar: A Multivariate Cointegration Approach," Journal of Applied Economics, Taylor & Francis Journals, vol. 8(1), pages 81-99, May.
    • Handle: RePEc:taf:recsxx:v:8:y:2005:i:1:p:81-99
    DOI: 10.1080/15140326.2005.12040619
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    Cited by:

    1. Sanidas, Elias, 2005. "The Australian Dollar's Long-Term Fluctuations and Trend: The Commodity Prices-cum-Economic Cycles Hypothesis," Economics Working Papers wp05-29, School of Economics, University of Wollongong, NSW, Australia.
    2. Fuentes, Fernanda & Herrera, Rodrigo & Clements, Adam, 2018. "Modeling extreme risks in commodities and commodity currencies," Pacific-Basin Finance Journal, Elsevier, vol. 51(C), pages 108-120.
    3. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2012. "Purchasing Power Parity between the UK and the Euro Area," Working papers 2012-46, University of Connecticut, Department of Economics.
    4. Giorgio Canarella & Stephen Miller & Stephen Pollard, 2014. "Purchasing Power Parity Between the UK and Germany: The Euro Era," Open Economies Review, Springer, vol. 25(4), pages 677-699, September.
    5. Sanidas, Elias, 2014. "Four harmonic cycles explain and predict commodity currencies' wide long term fluctuations," Technological Forecasting and Social Change, Elsevier, vol. 87(C), pages 135-151.

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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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