The demise of commodity price agreements: The role of exchange rates and special interests

Abstract

We derive the equilibrium joint distribution of exchange rate and commodity price in a two-country rational expectations model. The correlation between commodity price and exchange rate appears crucial for the stability of commodity markets. This result arises from the common practice to quote commodity prices in consuming countries' currency, which subjects producing countries to the currency risk. Welfare results of commodity price stabilization are obtained and facilitate the interpretation of the position taken by industrialized countries long opposed to international commodity agreements. We apply our model to the Philippines and investigate the potential effects of the International Su..