Working Paper: NBER ID: w13901
Authors: Yuchin Chen; Kenneth Rogoff; Barbara Rossi
Abstract: We show that "commodity currency" exchange rates have remarkably robust power in predicting global commodity prices, both in-sample and out-of-sample, and against a variety of alternative benchmarks. This result is of particular interest to policymakers, given the lack of deep forward markets in many individual commodities, and broad aggregate commodity indices in particular. We also explore the reverse relationship (commodity prices forecasting exchange rates) but find it to be notably less robust. We offer a theoretical resolution, based on the fact that exchange rates are strongly forward looking, whereas commodity price fluctuations are typically more sensitive to short-term demand imbalances.
Keywords: Exchange Rates; Commodity Prices; Granger Causality; Forecasting
JEL Codes: C52; C53; F31; F47
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| commodity prices (Q02) | exchange rates (F31) |
| commodity currency exchange rates (F31) | global commodity prices (Q02) |
| exchange rates of small commodity exporters (F31) | country-specific commodity price indices (Q02) |
| exchange rates (F31) | commodity prices (Q02) |