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The commodity currency puzzle

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This paper addresses the purchasing power parity (PPP) puzzle for commodity currencies. A substantial part of the literature on commodity currencies has found that, despite controlling for the effect of commodity prices, PPP does not hold in the long run. We show that once we also control for the effect of the interest rate differential in the real exchange rate relationship, the discrepancies from PPP are fully accounted for. The analysis is applied to the real exchange rate behaviour in Norway, which has a primary commodity (oil) that constitutes the majority of its exports. We show that with the interest rate differential included in the long run real exchange rate relationship, the real oil price plays a minor role. Adjustment to equilibrium (half-lives) is also substantially reduced, taking no more than one year on average. Hence, contrary to earlier findings on commodity currencies, we have effectively removed the PPP puzzle.

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  • Hilde C. Bjørnland & Håvard Hungnes, 2005. "The commodity currency puzzle," Discussion Papers 423, Statistics Norway, Research Department.
    • Handle: RePEc:ssb:dispap:423
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    Cited by:

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    2. Wu, Tao & An, Feng & Gao, Xiangyun & Wang, Ze, 2023. "Hidden causality between oil prices and exchange rates," Resources Policy, Elsevier, vol. 82(C).
    3. Stephanos Papadamou & Thomas Markopoulos, 2012. "The Monetary Approach to the Exchange Rate Determination for a “Petrocurrency”: The Case of Norwegian Krone," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 18(3), pages 299-314, August.
    4. Lambelet, Jean-Christian & Mihailov, Alexander, 2005. "The Triple-Parity Law," Economics Discussion Papers 8896, University of Essex, Department of Economics.
    5. Chen, Hongtao & Liu, Li & Wang, Yudong & Zhu, Yingming, 2016. "Oil price shocks and U.S. dollar exchange rates," Energy, Elsevier, vol. 112(C), pages 1036-1048.
    6. Муканов Нурбулат // Mukanov Nurbolat & Мекенбаева Камила // Mekenbayeva, 2017. "Оценка равновесного обменного курса в сырьевых экономиках // Assessment of equilibrium exchange rate in commodity based economies," Working Papers #2017-7, National Bank of Kazakhstan.
    7. RAJI Jimoh Olajide & ADEEL-FAROOQ Rana Muhammad & OYEWOLE Tajudeen Toyin, 2023. "Modelling The Impact Of Crude Oil Prices And Stock Price Index On Indonesia’S Exchange Rates," Studies in Business and Economics, Lucian Blaga University of Sibiu, Faculty of Economic Sciences, vol. 18(3), pages 244-260, December.
    8. Olagbaju Ifeolu O & Akinbobola Temidayo O, 2016. "A Non-Linear Analysis of the Oil Price-Exchange Rate Nexus in Nigeria," Journal of Economics and Behavioral Studies, AMH International, vol. 8(4), pages 79-91.
    9. Alam, Md. Samsul & Shahzad, Syed Jawad Hussain & Ferrer, Román, 2019. "Causal flows between oil and forex markets using high-frequency data: Asymmetries from good and bad volatility," Energy Economics, Elsevier, vol. 84(C).
    10. Tayfur Bayat & Saban Nazlioglu & Selim Kayhan, 2015. "Exchange Rate and Oil Price Interactions in Transition Economies: Czech Republic, Hungary and Poland," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(3), pages 267-285, June.
    11. Geir E. Alstad, 2010. "The long-run exchange rate for NOK: a BEER approach," Working Paper 2010/19, Norges Bank.

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    More about this item

    Keywords

    Exchange rate; commodity currencies; real oil price; purchasing power parity; uncovered interest parity.;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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