The Impact of Exchange Rates and Developing Country Debt on Commodity Prices

A general appreciation of the dollar will result in a corresponding fall in the dollar prices of primary commodities. The elasticity with respect to the value of the dollar will depend on supply and demand elasticities and on shares in world production and consumption of the commodity, but should be in the zero-one interval. Published estimates have indicated substantially greater elasticities, implying excess volatility of primary commodity prices. The author shows that this apparent excess volatility may be accounted for in terms of use of an inappropriate exchange rate index and through omission of wealth effects on LDCs associated with dollar-denominated debt.