After the Tide: Commodity Currencies and Global Trade

49 Pages Posted: 6 Mar 2017

See all articles by Robert Ready

Robert Ready

University of Rochester

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Colin Ward

University of Minnesota - Carlson School of Management

Date Written: October 26, 2016

Abstract

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

Ready, Robert and Roussanov, Nikolai L. and Ward, Colin, After the Tide: Commodity Currencies and Global Trade (October 26, 2016). Carnegie-Rochester Conference Series on Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2911712

Robert Ready

University of Rochester ( email )

Nikolai L. Roussanov (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Colin Ward

University of Minnesota - Carlson School of Management ( email )

Carlson School of Management
321 19th Avenue South
Minneapolis, MN 55455
United States

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