Do commodity prices affect exchange rate differently in developed and developing countries? A comparative study of OECD and ASEAN

In this thesis are compared the relationship between exchange rate and commodity prices between OECD and ASEAN commodity-exporting countries. Based on the similarity between OECD and ASEAN in terms of demographics, commodity export, financial markets, economic performance, and development prospects, the thesis makes some predictions for the relationship between real exchange rate and real commodity prices in ASEAN developing commodity-exporting countries when they reach 'developed country' status. Moreover, this thesis gives some policy implications for these countries in the management of commodity prices and exchange rate during the transition period. The relationship between real exchange rate and real commodity prices in the two groups of countries is examined in terms of cointegration, elasticity of real exchange rate to real commodity prices, and Granger causality by employing both time-series and panel-data techniques. The test results indicate that there is a considerable difference in this relationship between developed and developing commodity-exporting countries. Specifically, in OECD commodity-exporting countries, real commodity prices and real exchange rate move together in the same direction in the long run and changes in real commodity prices will lead to responses of real exchange rate in order to re-establish the equilibrium. Meanwhile, in ASEAN commodity-exporting countries, real commodity prices and real exchange rate do not seem to have long-term relationship. This thesis also gives explanations for the differences in the relationship between OECD and ASEAN commodity-exporting countries: differences in exchange rate regimes, ability to expand the natural-resource sector, and level of financial openness between the two groups of countries. It is expected that on the way to achieving the 'developed country' status, the three factors of ASEAN commodity-exporting countries would be likely to evolve toward the trend currently seen in OECD commodity-exporting countries and the relationship between real commodity prices and real exchange rate would become stronger. However, a stronger relationship between real exchange rate and real commodity prices might be harmful to the economy, especially when the financial system is underdeveloped. To reduce the negative effects of the relationship on the overall economy in the transition period, this thesis suggests that ASEAN commodity-exporting countries smooth their government spending, diversify export commodities and diversify their economies.