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Title:The commodity currency puzzle PDF Logo
Authors:Bjørnland, Hilde C.
Hungnes, Håvard
Issue Date:2005
Series/Report no.:Memorandum, Department of Economics, University of Oslo 2005,32
Abstract:This paper addresses the purchasing power parity (PPP) puzzle for a commodity currency. In particular, we analyse the real exchange rate behaviour in Norway, which has a primary commodity (oil) that constitutes the majority of its exports. A substantial part of the literature on commodity currencies has found that, despite controlling for the effect of commodity prices, PPP does not hold in the long run. We show that once we also control for the effect of the interest rate differential in the real exchange rate relationship, the discrepancies from PPP are fully accounted for. Furthermore, with the interest rate differential included in the long run real exchange rate relationship, the real oil price plays only a minor role. Adjustment to equilibrium (half-lives) is also substantially reduced, taking no more than one year on average. Hence, contrary to earlier findings on commodity currencies, we have effectively removed the PPP puzzle.
Subjects:Exchange rate
commodity currencies
real oil price
purchasing power parity
uncovered interest parity
JEL:C32
F31
Document Type:Working Paper
Appears in Collections:Memorandum, Department of Economics, University of Oslo

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