Exchange rates and commodity prices: Granger causality in the time–frequency domain

Abstract

I study the asset approach to exchange rates in the time–frequency domain. Using Australian data, I show that the Granger causality runs from the exchange rate to commodity prices – a proxy for economic fundamentals. This result holds at any point in time at business cycle and higher frequencies confirming the exchange rate present-value framework.

Keywords:

• exchange rates
• Granger causality
• time–frequency domain

JEL Classification:

• C50
• F31

Acknowledgements

I am grateful to the University of Cambridge for financial support. All errors and omissions are mine.

Notes

¹  The use of wavelets in economics is still limited. For recent contributions see Rua (2010), McLoughlin (2010) and Trezzi (2013).

²  Conventionally, high frequencies are periods up to 2 years, business cycle frequencies are cycles between 2 and 8 years, low frequencies are cycles longer than 8 years.

³  The only exception is during the 1980s for the spot exchange rate and only at high frequencies.