Scandinavian Working Papers in Economics
Memorandum,
Oslo University, Department of Economics
No 32/2005: The commodity currency puzzle
Hilde C. Bjørnland and Håvard Hungnes ()
Additional contact information
Hilde C. Bjørnland: Dept. of Economics, University of Oslo, Postal: Department of Economics, University of Oslo, P.O Box 1095 Blindern, N-0317 Oslo, Norway
Håvard Hungnes: Statistics Norway, Research Department., Postal: Kongens gate 6, POB 8131 Dep, N-0033 Oslo, Norway
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.
Keywords: Exchange rate; commodity currencies; real oil price; purchasing power parity; uncovered interest parity.
28 pages, December 20, 2005
Full text files
Memo-32-2005.pdf
- Published as
- Hilde C. Bjørnland and Håvard Hungnes, (2008), 'The commodity currency puzzle', The Icfai Journal of Monetray Economics, vol 6, no 2, pages 7-30
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