This paper examines whether the real exchange rates of commodity-exporting countries and the real prices of their commodity exports move together over time. Using International Monetary Fund (IMF) data on the world prices of 44 commodities and national commodity export shares, we construct new monthly indices of national commodity export prices for 58 commodity-exporting countries over 1980 -2002. Evidence of a long-run relationship between national real exchange rate and real commodity prices is found for about one-third of the commodity-exporting countries. The long-run real exchange rate of these 'commodity currencies' is not constant (as would be implied by purchasing power parity-based models) but is time varying, being dependent on movements in the real price of commodity exports. D

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The purpose of this appendix is to sketch a justification for our specification of the risk premium (equations 10 and 11 in the main text). The argument outlined below closely follows Bernanke, Gertler, and Gilchrist (1999, henceforth BGG). 1 Consider the contracting problem between a single entrepreneur, indexed by j, and foreign lenders in any period t. At the time of contracting, j's net worth (P t N j t ), the dollar interest rate (ρ t+1 ), and prices in period t are known. For now, assume also that the period t + 1 rental rate on capital in dollars, R t+1 /S t+1 , is known. We shall discuss this assumption shortly.Entrepreneurs and foreign creditors are risk neutral. Their joint problem is to choose a level of investment (K j t+1 ), a dollar loan (D j t+1 ), and a repayment schedule so as to maximize the expected return to the entrepreneur, such that creditors are paid at least their opportunity cost of funds, and subject to resource and information constraints. The latter are as follows. Investment in period t, K j t+1 , yields ω j t+1 K j t+1 (R t+1 /S t+1 ) dollars next period, where ω j t+1 is a random shock. The distribution of ω j t+1 is public information and is such that ω j t+1 is i.i.d. across j and t, and its expected value is one. Crucially, as in Townsend (1979) and Williamson (1987), we assume that the realization of ω j t+1 cannot be observed by lenders unless they pay a proportional monitoring cost of ζω j t+1 K j t+1 (R t+1 /S t+1 ); in contrast, ω j t+1 is observed freely by the entrepreneur. Under these conditions, it has been shown by Williamson (1987) that the optimal contract is a standard debt contract. Such a contract stipulates a fixed repayment, say of B j t+1 dollars; if the entrepreneur cannot repay that amount, lenders monitor the outcome and seize the whole yield on the investment. Clearly, monitoring occurs only if the realization of ω j t+1 is low enough. Lettingω be such that B j t+1 =ωK j t+1 (R t+1 /S t+1 ), monitoring occurs if and only if ω j t+1 is belowω, an event interpretable as bankruptcy.

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for excellent research assistantship and to Cristian Muñoz for data collection. We are also grateful to Luis Catao for sharing his data with us. We thank Guillermo Calvo, Choongsoo Kim, Harald Uhlig and three anonymous referees for very useful comments and suggestions. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research. NBER working papers are circulated for discussion and comment purposes. They have not been peerreviewed or been subject to the review by the NBER Board of Directors that accompanies official NBER publications.