Real Exchange Rates and Primary Commodity Prices

RePEc Short ID: pay93
ORCID iD: 0000-0002-1231-6323

Ayres, Joao; Hevia, Constantino; Nicolini, Juan Pablo

doi:10.21034/wp.743

Working Paper

Real Exchange Rates and Primary Commodity Prices

Abstract: In this paper, we show that a substantial fraction of the volatility of real exchange rates between developed economies such as Germany, Japan, and the United Kingdom against the US dollar can be accounted for by shocks that affect the prices of primary commodities such as oil, aluminum, maize, or copper. Our analysis implies that existing models used to analyze real exchange rates between large economies that mostly focus on trade between differentiated ?nal goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities.

Keywords: Primary commodity prices; Real exchange rate disconnect puzzle;

JEL Classification: F31; F41;

https://doi.org/10.21034/wp.743