Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/192405 
Year of Publication: 
2005
Series/Report no.: 
Discussion Papers No. 423
Publisher: 
Statistics Norway, Research Department, Oslo
Abstract: 
This paper addresses the purchasing power parity (PPP) puzzle for commodity currencies. 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. The analysis is applied to the real exchange rate behaviour in Norway, which has a primary commodity (oil) that constitutes the majority of its exports. We show that with the interest rate differential included in the long run real exchange rate relationship, the real oil price plays 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

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