Commodity Currencies and Real Exchange Rate Determination Minsoo Lee Economics Department Commerce Division Lincoln University Canterbury, New Zealand Email: leem2@lincoln.ac.nz Mudziviri Nziramasanga Department of Economics Washington State University Pullman, WA 99164-4741 USA MoonJoong Tcha Department of Economics University of Western Australia Crawley, WA 6009 Australia Abstract The real exchange rate reflects the relative competitiveness between trading partners, of which can have a large impact on a small open economy. This study uses a vector error correction model (VECM) to empirically examine the relative importance of structural macroeconomic and monetary variables in determining the real exchange rate, both in the short run and long run, in particular for the two countries with commodity currencies, Australia and New Zealand. We then use impulse response analysis to assess the impact of a standard deviation shock on each of these variables and on the real exchange rate. Our results confirm the validity of the Balassa-Samuelson effect regarding the persistence of the impact of changes in the terms of trade. Keywords: Exchange rates; Balassa-Samuelson effect; Purchasing power parity JEL Classification: F31