COMMODITY PRICES, EXCHANGE-RATES AND THEIR RELATIVE VOLATILITY

Exchange rates are move volatile than rates implied by PPP using conventional price indexes. This fact has led many to believe that exchange rates fluctuate more than is warranted by the variability in commodity prices and supports those who believe that fluctuations in exchange rates are excessive. We show that exchange rates are less volatile than commodity prices in auction markets and less volatile than rates implied by the law of one price using such prices. We also show that the behavior of exchange rates and the rates implied by these commodity prices is not consistent with the Dornbusch overshooting model. © 1990.