Working Paper: NBER ID: w1570
Authors: Sebastian Edwards
Abstract: In this paper a model that analyzes the interaction between changes in commodity export prices, money creation, inflation, and the real exchange rate in a developing country is developed. The model is then tested using data for Colombia. A number of experts have argued that the fluctuations of Colombia's real exchange rate have been mainly determined by world coffee price changes, with more observers emphasizing the consequences of coffee price changes on money creation and inflation. The results obtained indicate that coffee price changes have indeed been closely related to money creation and inflation. Also, coffee price changes have been negatively related to the rate of devaluation of the crawling peg. These results indicate that in Colombia, the real appreciation resulting from coffee price increases has been accommodated, partially by money creation and partially by an adjustment in the nominal exchange rate.
Keywords: Commodity Prices; Real Exchange Rate; Colombia; Coffee; Money Creation; Inflation
JEL Codes: F31; O24
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| coffee prices (D41) | money creation (E51) |
| coffee prices (D41) | inflation (E31) |
| coffee prices (D41) | nominal exchange rate devaluation (F31) |
| money creation (E51) | real appreciation (D46) |
| nominal exchange rate devaluation (F31) | real appreciation (D46) |