After the Tide: Commodity Currencies and Global Trade
49 Pages Posted: 6 Mar 2017
Date Written: October 26, 2016
The decade prior to the Great Recession saw a boom in global trade and rising transportation costs. High-yielding commodity exporters' currencies appreciated, boosting carry trade profits. The Global Recession sharply reversed these trends. We interpret these facts with a two-country general equilibrium model that features specialization in production and endogenous fluctuations in trade costs. Slow adjustment in the shipping sector generates boom-bust cycles in freight rates and, as a consequence, in currency risk premia. We validate these predictions using global shipping data. Our calibrated model matches the depreciation of commodity currencies during the Great Recession and explains about 57 percent of the narrowing of interest rate differentials post-crisis.
Keywords: shipping, trade costs, carry trade, currency risk premia, exchange rates, international risk sharing, commodity trade
JEL Classification: G15, G12, F31
Suggested Citation: Suggested Citation