Working Paper 743

Real Exchange Rates and Primary Commodity Prices

Joao Luiz Ayres | Research Analyst
Constantino Hevia
Juan Pablo Nicolini | Senior Research Economist

Published November 14, 2017

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 final goods could benefit, in terms of matching the behavior of real exchange rates, by also considering trade in primary commodities.

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


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