1 Volatility Relationship in Exchange Rate and Commodity Prices –An Empirical Study in Taiwan

We investigate the pass through effect related to volatility in nominal exchange rates and the consumer price index as well as the import price index of Taiwan in this paper. The monthly data series ranges from 1981 to 2009. Results indicate that time varying volatility in nominal exchange rates is higher than that of consumer prices. The conditional covariance of nominal exchange rates and consumer prices is negative; however, the conditional covariance of nominal exchange rates and import prices is positive. Both of these conditions were established over long durations. Patterns in the co-movement of nominal exchange rates and consumer prices soared during the Asian economic crisis in 1997; however, patterns in the co-movement of nominal exchange rates and consumer prices tumbled during the sub-prime mortgage crisis in 2007. This reveals idiosyncratic volatility in the relationship between exchange rates and the price of specific commodities