Trend of Commodity Prices and Exchange Rate in Australian Economy: Time Varying Parameter Model Approach
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Trend of Commodity Prices and Exchange Rate in Australian Economy: Time Varying Parameter Model Approach Debasish Roy1 · Ramaprasad Bhar2
© Springer Japan KK, part of Springer Nature 2020
Abstract Here we investigate the relationship between export commodity prices and AUD/ USD exchange rate fluctuation using time varying parameter model. Using monthly data for over 30 years we found that exchange rate is determined by commodity prices and Australian base metal indices is highly correlated with country’s exchange rate. We have considered linear Gaussian state space model where common variance is treated as a stochastic time varying variable which gets considered for modeling economic time series. Keywords Commodity indices · Exchange rate · Regression model · Time varying parameter JEL Classification F31 · Q02
1 Introduction In the recent past the world faced a global economic recession in 2007–2009. That time Australian Dollar (AUD) was strong compare to US dollar as Australian economy was more resilient. The exchange rate of a currency, for example the AUD, is determined by its demand, relative to another currency, say the US Dollar (USD). In general, demand for AUD is generated when Australian goods and services are sold, as these are priced in AUD. On the contrary, when Australia purchases goods and services from other countries Australian Dollar needs to be sold to purchase other currency. * Debasish Roy [email protected] Ramaprasad Bhar [email protected] 1
Department of Statistics, Amity University, Action Area II, Rajarhat, New Town, Calcutta 700 135, India
2
School of Risk and Actuarial Studies, The University of New South Wales, Sydney, Australia
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D. Roy, R. Bhar
Commodities (raw materials or primary agricultural goods) have accounted for around 55% of Australia’s total export value and 11% of GDP Robinson (2013). Australia is the world’s largest exporter of wool, wheat and iron ore. With such a large share of Australia’s export, this means that a change in commodity prices is likely to affect the demand for AUD and thus influences the exchange rate. The relationship between AUD and commodity prices were studied in Edwards (1985), Simpson (2002), Rossi (2005), Chen et al. (2008), Arezki et al. (2012). The authors found this relationship got influenced by different statistical techniques e.g. regression, ordinary least square, cointegration etc. Though there are some other factors that affect exchange rates such as cross-country differences in money supply, interest rates, output or inflation rates. The future demand for commodities is correlated with the exchange rate of commodity-exporting countries like Australia, New Zealand, Canada and South Africa. The stochastic volatility is a prime issue in the movements of foreign exchange rate and commodity indices. In this paper we deal with model uncertainty with respect to the time varying autoregressive (TVAR) model. This type of model is very flexible and suitable for time series modelling occurring in practice
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