Real Exchange Rates and Commodity Prices in a Neoclassical Model

Reinhart, Carmen

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Real Exchange Rates and Commodity Prices in a Neoclassical Model

IMF Working Paper No. 88/55

46 Pages Posted: 15 Feb 2006

See all articles by Carmen Reinhart

Carmen Reinhart

Harvard University - Center for Business and Government; Centre for Economic Policy Research (CEPR); World Bank; University of Maryland - School of Public Affairs; National Bureau of Economic Research (NBER); International Monetary Fund (IMF); Peterson Institute for International Economics; Harvard University, Harvard Kennedy School (HKS), Belfer Center for Science and International Affairs (BCSIA) ; Harvard University - Harvard Kennedy School (HKS)

Date Written: June 30, 1988

Abstract

This paper presents a neoclassical model that explains the observed empirical relationship between government spending and world commodity supplies and the real exchange rate and real commodity prices. It is shown that fiscal expansion and increasing world commodity supplies simultaneously lead to an appreciation of the real exchange rate and a decline in relative commodity prices. This structural model is estimated and its forecasting performance is compared to a variety of models. We find that theory and structure help in predicting commodity prices, although not the exchange rate, and that predictive ability increases as the forecast horizon is lengthened.

JEL Classification: 1320, 3210

Suggested Citation: Suggested Citation

Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen and Reinhart, Carmen, Real Exchange Rates and Commodity Prices in a Neoclassical Model (June 30, 1988). IMF Working Paper No. 88/55, Available at SSRN: https://ssrn.com/abstract=884848