Assessing the inflation hedging potential of coal and iron ore in Australia

The two most valuable commodity exports of Australia are coal and iron ore but their potential as a good hedge against inflation has remained unexplored in the literature. This is the motivation for the study. We employ alternative estimation methods ranging from threshold regression, regime switching regression to time-varying regression models. Our results reveal that both commodities exhibit the potential to hedge against inflation albeit with a greater impact coming from iron ore. However, macroeconomic conditions may influence the extent to which these commodities can serve as a good hedge against inflation. Moreover, ignoring time-variation and nonlinearities may lead to wrong conclusions.