The Heterogeneous Responses of the World Commodity Prices to Exchange Rate Shocks

We empirically investigate dynamic responses of 49 world commodity prices to exchange rate shocks using recursively identified vector autoregressive models. Our major empirical findings are as follows. First, price adjustments toward the new equilibrium tend to be gradual with a few exceptions. We propose two measures of price-stickiness that exhibit a high degree of short-run price rigidity in most commodities. Second, our dynamic elasticity analysis implies that commodity price responses are quite heterogeneous even in the long-run. Some commodity prices over-correct for the exchange rate shock, which implies higher volatility for those prices than the exchange rate. Third, for those commodities that over-react, domestic prices would rise significantly when the US dollar depreciates unexpectedly, perhaps suggesting a role for price stabilization policies.