A Long-Run Relationship between Real Exchange Rates and Real Commodity Prices: The Case of Mongolia

In Mongolia, the mining sector has been upgraded and developed very sharply last few years and some international experts stated that this growth will be hold up related to the strategic deposits such as Oyu tolgoi, Tavan tolgoi. It shows that Mongolia will become more relative to the foreign economy in the further. So, this paper tries to examine whether the real exchange rate and the real price of commodity exports move together over time in case of Mongolia. In this paper, we used the Engle and Granger (1987) co-integration approach to assess the long-run relationships between two variables and according to empirical results, the increase in price of Mongolian commodity exports appreciates the domestic real exchange rate. Also, the average half-life of adjustment of real exchange rates to commodity price is found to be about six months.