Keynes, Cocoa, and Copper: In Search of Commodity Currencies1

Ratna Sahay; Luis Felipe Céspedes; Paul Cashin

doi:10.5089/9781451875300.001.A001

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Keynes, Cocoa, and Copper

In Search of Commodity Currencies1

Author:

Ms. Ratna Sahay

Ms. Ratna Sahay
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Mr. Luis Felipe Céspedes

Mr. Luis Felipe Céspedes https://isni.org/isni/0000000404811396 International Monetary Fund

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Mr. Paul Cashin

Mr. Paul Cashin
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Contributor Notes

Authors’ E-Mail Addresses: Pcashin@imf.org; Lcespedes@imf.org; Rsahay@imf.org

Publication Date:: 01 Dec 2002

eISBN:: 9781451875300

Language:: English

Keywords:: WP; commodity currency; nonfuel commodity; exporters Canada; commodity export price; nontradable good; rate of change

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This paper examines whether the real exchange rates of commodity-exporting countries and the real prices of their commodity exports move together over time. Using IMF data on the world prices of 44 commodities and national commodity export shares, we construct new monthly indices of national commodity export prices for 58 countries over 1980-2002. A long-run relationship between real exchange rates and real commodity prices is found for about two-fifths of the commodity-exporting countries. Also, the behavior of the real exchange rate of commodity currencies is found to be independent of the nominal exchange rate regime. The average half-life of adjustment of real exchange rates to commodity-price-augmented purchasing power parity is found to be about eight months, which is much shorter than Rogoff’s (1996) consensus estimate of three to five years, and provides an important missing piece of the PPP puzzle.

Abstract

I. Introduction

“The neglect to allow for the effect of changes in the terms of trade is, perhaps, the most unsatisfactory characteristic of Prof. Cassel’s “Purchasing Power Parity Theory of the Foreign Exchanges “. For this not only upsets the validity of his conclusions over the long period, but renders them even more deceptive over the short period…” (Keynes (1930, p. 336)).

Attempts by economists to model long-run movements in real (price-level adjusted) exchange rates have typically proven to be rather unsuccessful. Meese and Rogoff (1983) demonstrated that a variety of linear structural exchange rate models failed to forecast more accurately than a naïve random walk model for both real and nominal exchange rates, and their key finding has not been overturned in the succeeding three decades. If the real exchange rate follows a random walk, then innovations to the real exchange rate persist and the time series can fluctuate without bound. This result is contrary to the theory of purchasing power parity (PPP), which states that there is a constant equilibrium level to which exchange rates converge, such that foreign currencies should possess the same purchasing power. Accordingly, PPP has proven to be a weak model of the long-run real exchange rate, and recent work has emphasized the time-varying nature of the long-run real exchange rate.

There is a large empirical literature on the determinants of the long-run real exchange rate, which has emphasized sectoral productivity differentials, government spending, cumulated current account imbalances, and interest rate differentials as important drivers of long-run deviations from purchasing power parity (see Froot and Rogoff (1995) and Rogoff (1996) for recent surveys). This literature has mainly concentrated on understanding the sources of real exchange rate fluctuations in developed countries, and the fruits of this research have been mixed, with many studies failing to find a statistical link between real exchange rates and the above explanators.²

In contrast to the preponderance of developed country studies of the behavior of real exchange rates, evidence on the behavior of developing country real exchange rates has been scarce. Those studies which have examined the determinants of developing country real exchange rates have largely focused on Latin America, and have emphasized the role of movements in the terms of trade in driving real exchange rate movements (see Diaz-Alejandro (1982), Edwards (1989), and Edwards and Savastano (1999)). There is also an extensive literature for some developed countries which links exogenous movements in the terms of trade of commodity-exporting countries and changes in their real exchange rates, particularly for commodity exporters Canada and Australia (see, among others, Amano and van Norden (1995) and Gruen and Wilkinson (1994)).

Rogoff (1996) summarizes the multitude of potential explanators offered by researchers in their attempts to resolve the PPP puzzle, which concerns the finding of many researchers that the speed of mean reversion of real exchange rates is too slow to be consistent with PPP. Chief among these explanators has been the recognition that real factors have a role in the determination of real exchange rates, through such channels as: the Balassa-Samuelson effect; real interest rate differentials; and portfolio balance models (where higher net foreign assets drive an appreciation of the exchange rate). However, while such factors may have resonance for developed countries, in the context of commodity-exporting countries (almost all of which are also developing countries), it is difficult to see much of a role for these real factors given the slow pace of relative productivity improvements in the production of tradables, the typical presence of both capital controls and underdeveloped domestic financial markets, and limited capital mobility.³

For developing countries, because primary commodities dominate their exports, fluctuations in world commodity prices have the potential to explain a large share of movements in their terms of trade. However, while terms of trade fluctuations have been considered a key determinant of developing country real exchange rates (Edwards (1989); De Gregorio and Wolf (1994)), it is surprising that there has been no comprehensive empirical work done to assess the mechanisms through which changes in relative commodity prices affect the real exchange rate.⁴ The main purpose of this paper is to systematically examine the relationship between the real exchange rate and relative commodity prices for all commodity-dependent economies.

Importantly, Obstfeld and Rogoff (2000) and Chen and Rogoff (2002) point out that in the presence of sticky producer prices and perfect pass-throughs, standard measures of the terms of trade will move one-to-one mechanically with the real exchange rate, making it extremely difficult to identify causality between the real exchange rate and terms of trade. More generally, if the extent of exchange rate pass-through is less for exports than for imports, a depreciation of the local currency will raise the local currency price of exports relatively less than it will raise the local currency price of imports—this will yield a decline in the terms of trade. Deaton and Miller (1996) used a measure of the terms of trade expressed in world prices to circumvent this potential endogeneity problem. We follow Deaton and Miller and construct, for each commodity-dependent economy, indices of real commodity prices which are defined as the world (nominal) price of their commodity exports relative to the world price of manufactured goods exports. Our measure of the world price of commodity exports aggregates changes in world commodity prices using actual national export shares of the commodity exports. For large commodity-exporting countries, world relative commodity prices are likely to be better at capturing the exogenous component of terms of trade shocks than standard terms of trade measures (Chen and Rogoff (2002)).⁵

This paper takes Keynes (1930) seriously, and will examine whether relative price movements within the tradables sector, in particular changes in the relative price of commodity exports to imports, are a major determinant of movements in developing country real exchange rates. As shocks to relative commodity export prices are both volatile and persistent, controlling for this important source of real shocks may help resolve some of the major empirical puzzles which persist in modeling real exchange rates. In particular, we will determine how many commodity-exporting countries have ‘commodity currencies,’ in that movements in their real exchange rates are affected by movements in the real price of their commodity exports.⁶

The key objective of this paper is to examine whether movements in real commodity export prices can explain fluctuations in the real exchange rates of individual commodity-dependent countries. The paper does so in several ways. First, a new monthly dataset of country-specific export price indices is constructed for 58 countries over the period January 1980 to March 2002. Each country’s export price index is a geometric weighted average of world commodity prices, using country-specific export shares as weights. Second, using empirical techniques which allow for structural shifts in the long-run relationship between time series, we find strong evidence of a long-run relationship between the real exchange rate and real commodity prices for about two-fifths of the commodity-exporting countries in our sample. For these commodity currencies, movements in real commodity prices are an important determinant of long-run deviations of real exchange rates from purchasing power parity. Third, qualifying Mussa’s (1986) finding for industrial countries, the behavior of the real exchange rate of commodity currencies is found to be independent of the nominal exchange rate regime. Fourth, contrary to the findings of Calvo, Reinhart, and Végh (1995) for Latin America, commodity currencies are not real exchange rate targeters, as movements in the real exchange rate are found to be more volatile than movements in real commodity prices. Fifth, weak exogeneity tests carried out within a vector error correction framework indicate highly significant causality running from real commodity prices to the real exchange rate. When deviations from the long-run equilibrium relationship occur in commodity currencies, it is primarily the real exchange rate that adjusts to restore long-run equilibrium. For commodity currencies, the average half-life of adjustment of real exchange rates to commodity-price-augmented purchasing power parity is about eight months, which is much shorter-lived than Rogoff’s (1996) consensus estimate of the half-life of deviations from purchasing power parity of between three to five years. This rapid speed of mean reversion supports the equilibrium approach to exchange rate determination, and provides an important missing piece of the PPP puzzle.

The paper is organized as follows. Section II briefly sets out the theoretical relationship between real commodity prices and the real exchange rate. Section III explains the sources and construction of the national real exchange rate and real commodity export price data used in this study. Section IV applies cointegration and vector error correction methodology to examine both the long-run and short-run determinants of the real exchange rate in commodity-dependent countries, especially the relationship between the real exchange rate and real commodity prices. It then questions whether the nominal exchange rate regime matters for commodity currencies; examines the relative volatility of the real exchange rate and real commodity prices of countries with commodity currencies; draws inferences regarding causality between the two series; and examines the speed of reversion of the real exchange rates to their commodity-price-dependent equilibria. Section V concludes.

II. Theoretical framework

We consider a small open economy that produces two different types of goods; a nontradable good and an exportable good. For the purpose of our work, we associate the production of this exportable good with the production of a primary commodity (agricultural or mineral product). Nevertheless, our analysis is in line with the literature that stresses the role of the terms of trade in the determination of the real exchange rate, which includes (among others) work by De Gregorio and Wolf (1994) and Obstfeld and Rogoff (1996).

In our analysis, factors are mobile and the exportable good (as well as nontraded good) is produced domestically. Therefore, we abstract from demand-side considerations and concentrate on a representation of long-run relative price determination.⁷ The details of the model are as follows.

A. Domestic Production

There are two different sectors in the domestic economy: one sector produces an exportable called “primary commodity”, the other sector consists of a continuum of firms producing a nontradable good. For simplicity, we assume that the production of these two different types of goods requires labor as the only factor. In particular, the production function for the primary commodity is:

\begin{matrix} y_{x} = a_{x} L_{x} & (1) \end{matrix}

where L_x is the amount of the labor input demanded by the commodity sector and a_x measures how productive labor is in this sector. In a similar fashion, the nontraded good is produced through the production function:

\begin{matrix} y_{N} = a_{N} L_{N} & (2) \end{matrix}

where a_N captures the productivity of labor in the production of this good and L_N is the employment of labor in the nontradable sector. Crucially, we assume that labor can move freely across sectors in such a way that labor wages must be the same across sectors. Profit maximization in both sectors yields the familiar conditions:

\begin{matrix} \begin{array}{l} P_{x} = \frac{w}{a_{x}} \\ P_{N} = \frac{w}{a_{N}} \end{array} & (3) \end{matrix}

In equilibrium, the marginal productivity of labor must equal the real wage in each sector. We assume that the price of the primary commodity is exogenous for (competitive) firms in the commodity sector, and that there is perfect competition in the nontraded sector. Therefore, we can rewrite the price of the nontraded good in order to express it as a function of the price of the exportable and the relative productivities between the export and nontradable sectors. We obtain:

\begin{matrix} P_{N} = \frac{a_{X}}{a_{N}} P_{X} & (4) \end{matrix}

Thus, the relative price of the nontraded good (P_n) with respect to the primary commodity (P_X) is completely determined by technological factors and is independent of demand conditions. Notice that an increase in the price of the primary commodity will increase the wage in that sector (see equation (3)). Given our freely mobile labor assumption, wages and prices will also rise in the nontraded sector.

B. Domestic Consumers

The economy is inhabited by a continuum of identical individuals that supply labor inelastically (with L = L_X + L_N) and consume a nontraded good and a tradable good. This tradable good is imported from the rest of the world and is not produced domestically. Our assumptions on preferences imply that the primary commodity is also not consumed domestically. Each individual chooses the consumption of the nontraded and tradable good to maximize utility, which is assumed to be increasing in the level of aggregate consumption given by:

\begin{matrix} C = κ C_{N}^{γ} C_{T}^{1 - γ} & (5) \end{matrix}

where C_N represents purchases of the nontraded good, C_T purchases of the imported good and κ = l/[γ^γ (l-γ)^(l-γ)] is an irrelevant constant. The minimum cost of one unit of consumption C is given by:

\begin{matrix} P = P_{N}^{γ} P_{T}^{1 - γ} & (6) \end{matrix}

where P_T is the price in local currency of one unit of the tradable good. As usual, P is defined as the consumer price index. Now, the law of one price is assumed to hold for the imported good:

\begin{matrix} P_{T} = \frac{P_{T}^{*}}{E} & (7) \end{matrix}

where E is the nominal exchange rate, defined as the amount of foreign currency per local currency, and $P_{T}^{*}$ is the price of the tradable (imported) good in terms of foreign currency. We now specify in more detail the rest of the world.

C. Foreign Production and Consumption

So far we have assumed that the primary commodity is not consumed by domestic agents and is therefore completely exported. In addition, the domestic economy also imports a good that is produced only by foreign firms.⁸ The foreign region consists of three different sectors: a nontraded sector; an intermediate sector; and a final good sector. The nontraded sector produces a good that is consumed only by foreigners using labor as the only factor. The technology available for the production of this good is given by:

\begin{matrix} Y_{N}^{*} = a_{N}^{*} L_{N}^{*} & (8) \end{matrix}

The foreign economy also produces an intermediate good that is used in the production of the final good. This intermediate good is produced using labor as the only factor. In particular, the production function available to firms in this sector is represented by:

\begin{matrix} Y_{I}^{*} = a_{I}^{*} L_{I}^{*} & (9) \end{matrix}

Labor mobility across (foreign) sectors ensures that the (foreign) wage is equated across sectors.⁹ Again, we can express the price of the foreign nontraded good as a function of relative productivities and the price of the foreign intermediate good:

\begin{matrix} P_{N}^{*} = \frac{a_{I}^{*}}{a_{N}^{*}} P_{I}^{*} & (10) \end{matrix}

The production of the final good involves two intermediate inputs. The first is the primary commodity (produced by several countries, among them our domestic economy). The second is an intermediate good produced in the rest of the world. Producers of this final good, also called the tradable good, produce it by assembling the foreign intermediate input (Y_I) and the foreign primary commodity (Y_X) through the following technology:

\begin{matrix} Y_{T}^{*} = ν {(Y_{I}^{*})}^{β} {(Y_{X}^{*})}^{1 - β} & (11) \end{matrix}

Now, it is straightforward to show that the cost of one unit of the tradable good in terms of the foreign currency is given by:

\begin{matrix} P_{T}^{*} = {(P_{I}^{*})}^{β} {(P_{X}^{*})}^{1 - β} & (12) \end{matrix}

Foreign consumers are assumed to consume the foreign nontraded good and this final good in the same fashion as the domestic consumers. They also supply labor inelaslically to the different sectors. Therefore, the consumer price index for the foreign economy can be represented by:

\begin{matrix} P^{*} = {(P_{N}^{*})}^{γ} {(P_{T}^{*})}^{1 - γ} & (13) \end{matrix}

D. Real Exchange Rate Determination

It is now straightforward to show how the real exchange rate is determined in the domestic economy. First, we define the real exchange rate as the domestic price of the basket of consumption relative to the foreign price of a common basket of consumption (EP/P*). Using equations (6) and (13) we can show that:

\begin{matrix} \frac{EP}{P^{*}} = {(\frac{a_{X}}{a_{I}^{*}} \frac{a_{N}^{*}}{a_{N}} \frac{P_{X}^{*}}{P_{I}^{*}})}^{γ} & (14) \end{matrix}

where the term $P_{X}^{*} / P_{I}^{*}$ corresponds to the commodity terms of trade (or the price of the primary commodity with respect to the intermediate foreign good) measured in foreign prices, $a_{X} / a_{I}^{*}$ reflects the productivity differentials between the export and import (foreign) sectors, and $a_{N}^{*} / a_{N}$ accounts for the productivity differentials between the local and foreign nontraded sectors. These last two terms embody the Balassa- Samuelson effect—an increase in productivity in the commodity sector will tend to increase wages, which translates into an increase in the price of the nontraded good. As the relative price of the primary commodity is exogenously determined, the final effect will be an appreciation of the real exchange rate.

In the empirical analysis of this paper, we will be centering our work on explaining the evolution of the real exchange rate of commodity-dependent economies. That is, economies in which one of the major sources driving movements in the real exchange rate is fluctuations in the commodity terms of trade. How do fluctuations in the relative commodity price translate into movements in the real exchange rate? In our simple model, an increase in the international price of the primary commodity will increase wages in the commodity sector. As wages are equal across sectors, the increase in wages will raise the relative price of the nontraded good and, therefore, appreciate the real exchange rate.

III. Data

The data used to examine whether there is a relationship between the real exchange rate of individual countries and the real price of their commodity exports are monthly time series, obtained from the International Monetary Fund’s International Financial Statistics (IFS) and Information Notice System (INS) databases over the period January 1980 to March 2002, which gives a total of 267 observations.

A. Real Exchange Rate

The definition of the real exchange rate is the real effective exchange rate (REER) based on consumer prices (line rec). As such, we will examine the behavior of REER based on: (i) the nominal effective exchange rate (NEER), which is the trade-weighted average of bilateral exchange rates vis-à-vis trading partners’ currencies; adjusted for (ii) differentials between the domestic price level (which is the consumer price index) and the foreign price level (which is the trade-weighted average of trading partners’ consumer price indices) (RELP). We analyze effective rather than bilateral real exchange rates as the effective rate measures the international competitiveness of a country against all its trade partners, and helps to avoid potential biases associated with the choice of base country in bilateral real exchange rate analyses.

The REER indices measure how nominal effective exchange rates, adjusted for price differentials between the home country and its trading partners, have moved over a period of time. The CPI-based REER indicator is calculated as a weighted geometric average of the level of consumer prices in the home country relative to that of its trading partners, expressed in a common currency. The International Monetary Fund’s seasonally-adjusted, CPI-based REER indicator of country i is defined as: ${REER}_{i} = [(P_{i} R_{i}) / \exp \sum_{i = 1}^{n} (W_{i j} \ln (P_{i} R_{i}))]$ , where j is an index that runs (from 1 to n) over country i’s trade partner (or competitor) countries; W_ij is the trade weight attached by country i to country j, which are based on 1988-90 average data on the composition of trade in manufacturing, non-oil primary commodities and tourism services; P_i and P_j are the seasonally adjusted consumer price indices in countries i and j; and R_i and R_j are the nominal exchange rates of countries i and j’s currencies in U.S. dollars.¹⁰ The national REER series are expressed in logarithmic form (see Appendix I for additional details).

B. Real Commodity Price

The definition of the real price of commodity exports (RCOMP) is: the nominal price of commodity exports (NCOMP) deflated by the International Monetary Fund’s index of (the unit value of) manufactured exports (MUV).¹¹ This paper follows Deaton and Miller (1996) and constructs NCOMP as a geometrically-weighted index of the nominal prices of 44 individual commodity exports, where for each country:

NCOMP = \exp {\sum_{k = 1}^{K} (W_{k} (\ln P_{k}))}, where W_{k} = ((P_{j k} Q_{j k}) / (\sum_{k} (P_{j k} Q_{j k})), P_{k}

is the index of the dollar world price of commodity k (taken from the International Monetary Fund’s IFS); W_k is the weighting item, which is the value of exports of commodity k in the total value of all K commodity exports, for the constant base period j; and Q is the quantity of exports of commodity k (taken from UN COMTRADE data).¹² Importantly, each country’s NCOMP will be unique, because W_k is country specific.¹³ The national RCOMP series are expressed in logarithmic form (see Appendix II for additional details).

Most previous studies of the macroeconomic effects of commodity price movements in developing countries have used either the prices of individual primary commodities (Cuddington and Urzua (1989)), terms of trade indices (Cashin and Pattillo (2000)) or aggregate (noncountry-specific) indices of commodity price movements (Grilli and Yang (1988)). The exceptions have been the country-specific indices of prices of commodity exports constructed by Deaton and Miller (1996) and Dehn (2000).¹⁴ Few exporters of nonfuel commodities are so specialized that the export prices of a single commodity can well approximate movements in an index of commodity export prices based on the export baskets of individual commodity-exporting countries. In addition, terms of trade indices are too broad, as they also cover movements in noncommodity prices (Dehn (2000)). Terms of trade indices are also typically calculated using export and unit values, which are affected by the composition of exports and so by the composition of GDP (Deaton and Miller (1996)). Finally, movements in aggregate commodity price indices are likely to poorly represent the movements in country-specific commodity export price indices, as prices of individual commodities do not tend to move together on world commodity markets (Cashin, McDermott, and Scott (1999)).

Following Deaton and Miller (1996), the commodity export weights used in the construction of our national commodity price indices are held fixed over time as we are interested in constructing an exogenous variable, and so exclude volume effects of changes in commodity export prices.¹⁵ In addition, one of the chief advantages of using world commodity prices is that they are typically exogenous to the behavior of individual countries. The exogeneity of world commodity prices is consistent with the small share of world commodity markets held by most developing countries, even for those commodities in which they are highly concentrated. Previous empirical analyses have concluded that commodity-exporting countries are price takers on world commodity markets, and have negligible long-term market power in the markets for their commodity exports (Mendoza (1995), Broda (2002), World Bank (1994)).

C. Potential Commodity-Currency Countries

In selecting commodity-dependent developing countries to be included in our sample, we followed the classification of developing countries used in the International Monetary Fund’s World Economic Outlook, for the years 1988-92, the mid-point of our sample (IMF (1996a)). The International Monetary Fund classifies developing countries by the composition of their export earnings and other income from abroad, and has five categories: fuel (Standard International Trade Classification (SITC 3); manufactures (SITC 5 to 8, less 68); nonfuel primary products (SITC 0, 1, 2, 4, and 68); services, income, and private transfers (exporters of services and recipients of income from abroad, including workers’ remittances), and diversified export earnings. Countries whose 1988-92 export earnings in any of the first four categories accounted for more than half of total export earnings are allocated to that group, while countries whose export earnings were not dominated by any of the first four categories are defined as countries with diversified export earnings (see IMF (1996a) and Appendix III).

Those developing countries in the IMF’s category of nonfuel primary products are included in our sample, as are those in the category diversified export earnings, as many of these countries derive a large (yet not dominant) share of their export earnings from the export of nonfuel primary products. On this basis, the number of countries with potential commodity currencies is 73. Of these 73 countries, 12 were excluded from our analysis due to the unavailability of a consistent time series of data on their real effective exchange rate, leaving 61 developing countries in our sample. Of these 61 countries, 8 were excluded due to the unavailability of UN COMTRADE data on their commodity exports, leaving 53 developing countries in our sample. In addition, 5 commodity-dependent industrial countries (Australia, Canada, Iceland, Norway, and New Zealand) were included in our sample, to compare and contrast their results with those of the commodity-dependent developing countries. The 58 countries in our sample are listed (by geographic region) in Appendix III.

As expected, the export of commodities is a major source of export income for the 58 countries in our sample of commodity-exporting countries. In Table 1 we report the export share of the three most important commodity exports, and the total export share of the 44 individual commodities used to construct the indices of the nominal world price of national export baskets. During the 1990s, the cross-country mean share of total export receipts derived from primary commodity exports was about 48 percent. Among sub-Saharan African countries, commodity exports typically exceeded 50 percent of total exports, especially for Burundi (97 percent), Madagascar (90 percent), and Zambia (88 percent). Even among developed countries, the share of primary commodity exports in total exports is quite high (Australia, 54 percent; Iceland 56 percent). In addition, many countries remain overwhelmingly dependent on export receipts from their dominant commodity exportable— cases where the dominant exportable exceeded 90 percent of commodity export receipts include Niger (uranium), Dominica (bananas), Ethiopia (coffee), Zambia (copper), and Mauritius (sugar) (see Table 1).

Table 1.

Principal Commodity Exports and Share of Primary Commodities in Total Exports, 1990–99

Sources: United Nations (COMTRADE); International Monetary Fund, commodity price indices. Notes: Columns marked 1–3 denote the three largest commodity exports of each country, and their share of total commodity exports. The column marked 44 denotes the share of total exports of goods that the 44 commodities tracked by the IMF comprise, and which were used in the construction of the nominal national commodity-price series.

Table 1.

Principal Commodity Exports and Share of Primary Commodities in Total Exports, 1990–99

	Principal Exports			Share of Exports
Country	1	2	3	1	2	3	44
Argentina	Soy Meal	Wheat	Maize	18	13	11	41
Australia	Coal	Gold	Aluminum	22	14	12	54
Bangladesh	Shrimp	Tea	Fish	76	15	8	8
Bolivia	Zinc	Tin	Gold	27	18	13	56
Brazil	Iron	Coffee	Aluminum	21	15	10	35
Burundi	Coffee	Gold	Tea	59	35	2	97
Cameroon	Cocoa	Hardwood Logs	Aluminum	23	22	14	53
Canada	Softwood Sawn	Aluminum	Wheat	28	14	12	16
Central African Republic	Cotton	Coffee	Softwood Logs	82	9	5	43
Chile	Copper	Fish	Fishmeal	70	9	6	58
Colombia	Coffee	Coal	Bananas	48	19	18	40
Costa Rica	Bananas	Coffee	Fish	43	33	5	31
Côte d’Ivoire	Cocoa	Coffee	Cotton	65	14	6	65
Dominica	Bananas	Tobacco		98	1		32
Ecuador	Bananas	Shrimp	Coffee	45	30	8	49
Ethiopia	Coffee	Hides	Cotton	91	5	2	71
Ghana	Cocoa	Gold	Aluminum	61	24	7	72
Guatemala	Coffee	Sugar	Bananas	47	24	14	49
Honduras	Coffee	Bananas	Shrimp	47	30	6	67
Iceland	Fish	Aluminum	Shrimp	73	20	7	56
India	Rice	Shrimp	Soy Meal	18	15	12	31
Indonesia	Crude Petroleum	Natural Gas	Natural Rubber	34	23	7	43
Kenya	Tea	Coffee	Fish	53	30	5	45
Madagascar	Coffee	Shrimp	Sugar	42	40	6	39
Malawi	Tobacco	Tea	Sugar	78	8	7	90
Malaysia	Palm Oil	Natural Rubber	Hardwood Logs	44	15	15	13
Mali	Cotton	Gold		88	12		85
Mauritania	Iron	Fish	Gold	65	34	1	64
Mauritius	Sugar	Wheat		97	1		27
Mexico	Crude Petroleum	Copper	Coffee	72	5	5	15
Morocco	Phosphate Rock	Fish	Lead	55	14	7	14
Mozambique	Cotton	Sugar	Maize	33	19	9	26
Myanmar	Hardwood Logs	Rice	Shrimp	60	18	7	52
New Zealand	Lamb	Beef	Wool	20	17	14	36
Nicaragua	Coffee	Beef	Shrimp	32	15	14	69
Niger	Uranium	Tobacco		96	3		68
Norway	Crude Petroleum	Natural Gas	Fish	67	13	8	63
Pakistan	Rice	Cotton	Sugar	46	28	13	12
Papua New Guinea	Copper	Gold	Palm Oil	23	23	20	59
Paraguay	Soybeans	Cotton	Soy Meal	44	26	9	79
Philippines	Coconut Oil	Copper	Bananas	29	21	12	10
Peru	Copper	Fishmeal	Gold	28	19	15	69
Sri Lanka	Tea	Natural Rubber	Tobacco	78	9	6	20
St. Vincent & Grenadines	Bananas	Wheat	Rice	60	23	17	72
Sudan	Cotton	Gold	Sugar	45	12	12	44
Suriname	Aluminum	Rice	Nickel	80	8	5	86
Syrian Arab Republic	Crude Petroleum	Cotton	Wheat	88	8	2	74
Tanzania	Coffee	Tobacco	Cotton	27	18	17	59
Thailand	Rice	Natural Rubber	Shrimp	26	24	23	16
Togo	Phosphate Rock	Cotton	Coffee	44	40	9	84
Tunisia	Tobacco	Phosphate Rock	Shrimp	23	21	20	8
Turkey	Tobacco	Wheat	Sugar	34	16	14	8
Uganda	Coffee	Fish	Gold	71	8	4	84
Uruguay	Beef	Rice	Fish	36	27	13	32
Zambia	Copper	Sugar		97	2		88
Zimbabwe	Tobacco	Cotton	Nickel	58	8	8	54

Table 1.

Principal Commodity Exports and Share of Primary Commodities in Total Exports, 1990–99

	Principal Exports			Share of Exports
Country	1	2	3	1	2	3	44
Argentina	Soy Meal	Wheat	Maize	18	13	11	41
Australia	Coal	Gold	Aluminum	22	14	12	54
Bangladesh	Shrimp	Tea	Fish	76	15	8	8
Bolivia	Zinc	Tin	Gold	27	18	13	56
Brazil	Iron	Coffee	Aluminum	21	15	10	35
Burundi	Coffee	Gold	Tea	59	35	2	97
Cameroon	Cocoa	Hardwood Logs	Aluminum	23	22	14	53
Canada	Softwood Sawn	Aluminum	Wheat	28	14	12	16
Central African Republic	Cotton	Coffee	Softwood Logs	82	9	5	43
Chile	Copper	Fish	Fishmeal	70	9	6	58
Colombia	Coffee	Coal	Bananas	48	19	18	40
Costa Rica	Bananas	Coffee	Fish	43	33	5	31
Côte d’Ivoire	Cocoa	Coffee	Cotton	65	14	6	65
Dominica	Bananas	Tobacco		98	1		32
Ecuador	Bananas	Shrimp	Coffee	45	30	8	49
Ethiopia	Coffee	Hides	Cotton	91	5	2	71
Ghana	Cocoa	Gold	Aluminum	61	24	7	72
Guatemala	Coffee	Sugar	Bananas	47	24	14	49
Honduras	Coffee	Bananas	Shrimp	47	30	6	67
Iceland	Fish	Aluminum	Shrimp	73	20	7	56
India	Rice	Shrimp	Soy Meal	18	15	12	31
Indonesia	Crude Petroleum	Natural Gas	Natural Rubber	34	23	7	43
Kenya	Tea	Coffee	Fish	53	30	5	45
Madagascar	Coffee	Shrimp	Sugar	42	40	6	39
Malawi	Tobacco	Tea	Sugar	78	8	7	90
Malaysia	Palm Oil	Natural Rubber	Hardwood Logs	44	15	15	13
Mali	Cotton	Gold		88	12		85
Mauritania	Iron	Fish	Gold	65	34	1	64
Mauritius	Sugar	Wheat		97	1		27
Mexico	Crude Petroleum	Copper	Coffee	72	5	5	15
Morocco	Phosphate Rock	Fish	Lead	55	14	7	14
Mozambique	Cotton	Sugar	Maize	33	19	9	26
Myanmar	Hardwood Logs	Rice	Shrimp	60	18	7	52
New Zealand	Lamb	Beef	Wool	20	17	14	36
Nicaragua	Coffee	Beef	Shrimp	32	15	14	69
Niger	Uranium	Tobacco		96	3		68
Norway	Crude Petroleum	Natural Gas	Fish	67	13	8	63
Pakistan	Rice	Cotton	Sugar	46	28	13	12
Papua New Guinea	Copper	Gold	Palm Oil	23	23	20	59
Paraguay	Soybeans	Cotton	Soy Meal	44	26	9	79
Philippines	Coconut Oil	Copper	Bananas	29	21	12	10
Peru	Copper	Fishmeal	Gold	28	19	15	69
Sri Lanka	Tea	Natural Rubber	Tobacco	78	9	6	20
St. Vincent & Grenadines	Bananas	Wheat	Rice	60	23	17	72
Sudan	Cotton	Gold	Sugar	45	12	12	44
Suriname	Aluminum	Rice	Nickel	80	8	5	86
Syrian Arab Republic	Crude Petroleum	Cotton	Wheat	88	8	2	74
Tanzania	Coffee	Tobacco	Cotton	27	18	17	59
Thailand	Rice	Natural Rubber	Shrimp	26	24	23	16
Togo	Phosphate Rock	Cotton	Coffee	44	40	9	84
Tunisia	Tobacco	Phosphate Rock	Shrimp	23	21	20	8
Turkey	Tobacco	Wheat	Sugar	34	16	14	8
Uganda	Coffee	Fish	Gold	71	8	4	84
Uruguay	Beef	Rice	Fish	36	27	13	32
Zambia	Copper	Sugar		97	2		88
Zimbabwe	Tobacco	Cotton	Nickel	58	8	8	54

The REER data (base 1990=100) for all countries are set out in Figures 1 to 10—an increase in the REER series indicates a real appreciation of the country’s currency. Several features of the data stand out. First, a cursory inspection of the REER series indicates that most countries have real exchange rates that appear to exhibit symptoms of drift or nonstationarity. There appear to be substantial and sustained deviations from purchasing power parity (that is, nonstationarity in the REER). Typically, the evolution of the REER appears to be a highly persistent, slow-moving process; for most countries the REER does not appear to cycle about any particular equilibrium value, especially for countries such as Ecuador and India (the general depreciation of its exchange rate is typical of a process with a unit root). Second, sharp movements in the REER during the 1980s and 1990s are a relatively frequent occurrence, especially for countries experiencing rapid nominal devaluations, such as the countries of the CFA franc zone (for example, Mali and Togo).

Figure 1.

Real Exchange Rate and Real Commodity Price, Commodity-Exporting Countries, 1980:1-2002:3

Citation: IMF Working Papers 2002, 223; 10.5089/9781451875300.001.A001

Figure 2.