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Modelling the real yen–dollar rate and inflation dynamics based on international parity conditions

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  • Almaas, Synne S.
  • Kurita, Takamitsu

Abstract

This study aims to explore the dynamics of the real yen–dollar rate and inflation rates by analysing Japan–US monthly economic data in recent years. A real interest differential (RID) derived from international parity conditions plays a critical role in the empirical exploration. A multivariate analysis of the data reveals evidence which supports the RID hypothesis as a long-run economic relationship, distinct from the existing evidence in literature. The relationship also paves a way for the regime-switching analysis that explicitly allows for influences of the two countries’ monetary policies. The non-linear dynamic nature of the real yen–dollar rate is clarified in this analysis.

Suggested Citation

  • Almaas, Synne S. & Kurita, Takamitsu, 2019. "Modelling the real yen–dollar rate and inflation dynamics based on international parity conditions," Journal of Asian Economics, Elsevier, vol. 61(C), pages 51-64.
    • Handle: RePEc:eee:asieco:v:61:y:2019:i:c:p:51-64
    DOI: 10.1016/j.asieco.2019.02.003
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    More about this item

    Keywords

    Real yen–dollar rate; International parity conditions; Real interest differential; Cointegration; Regime-switching analysis;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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