Does Exchange Rate Impact Commodity Prices: Evidence From a Small Open Economy

Abstract The paper assesses the dynamics of exchange rate and the terms of trade on industrial commodity prices. We investigate the linear and asymmetric effects of exchange rate on commodity prices using an error correction model (ECM) and a threshold autoregressive (TAR) model that allows to estimate the dynamics of different regimes. Further we employ a structural vector autoregressive (SVAR) model to examine the impact of an external shock on the terms of trade using quarterly data over the period 1992q1 to 2019q4.The results suggest that an exchange rate above or equal 4.6 has a positive and significant impact on commodity prices. Specifically, if real exchange rate is above the threshold 4.6, the price of gold, copper, and nickel increases by 0.9 %, 1.1%, and 2.7%, respectively. We also find that a 1% increase in real interest rate is associated with a 0.003% fall in the terms of trade. JEL classification: E31, E43, F3