Constantino Hevia, UTDT

Paper: On the Pass-through of Primary Commodity Prices to Real Exchange Rates

Abstract: We argue that volatile shocks to primary commodity markets are a major, underappreciated driver of real exchange rate (RER) volatility between developed economies. While the value-added share of commodities is small, our model demonstrates that high commodity price volatility can generate significant RER fluctuations, provided markets are incomplete. Crucially, this mechanism operates independently of the exchange rate regime, challenging the view that RER volatility is solely driven by the breakdown of Bretton Woods. Empirical evidence from fixed exchange rate regimes supports our theoretical findings, confirming that commodity shocks directly influence RER volatility.