The Commodity-Currency View of the Australian Dollar: A Multivariate Cointegration Approach

Using Australian quarterly data from the post-float period 1984:1-2003:1 and a partial system, we identify and estimate two cointegrating relations, one for the interest-rate differential and the other for the nominal exchange rate. Our estimate of the long-run elasticity of the exchange rate with respect to commodity prices is 0.939, which strongly supports the widely held view that the floating Australian dollar is a ‘commodity currency’. We also find that the PPP and UIP cannot be rejected so long as commodity prices are included in the cointegrating relations. Our model outperforms the random walk model in forecasting the exchange rate in the medium run.

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Publication Type:
Journal Article
DOI and Other Identifiers:
Print ISSN 1514-0326 (Other)
Online ISSN 1667-6726 (Other)
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Published in:
Journal of Applied Economics, Volume 08, Number 1
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JEL Codes:
F31; F41

 Record created 2017-04-01, last modified 2018-01-22

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