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Real Exchange Rate Fluctuations and the Business Cycle: Evidence from Japan

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  • Eswar Prasad
  • Bankim Chadha

Abstract

This paper analyzes the relationship between the real exchange rate and the business cycle in Japan during the floating rate period. A structural vector autoregression is used to identify different types of macroeconomic shocks that determine fluctuations in aggregate output and the real exchange rate. Relative nominal and real demand shocks are found to be the main determinants of variation in real exchange rate changes, whereas relative output growth is driven primarily by supply shocks. Historical decompositions suggest that the sharp appreciations of the yen in 1993 and 1995 and its subsequent depreciation can be attributed primarily to relative nominal shocks.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 96/132.

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Length: 34
Date of creation: 01 Nov 1996
Date of revision:
Handle: RePEc:imf:imfwpa:96/132

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Cited by:
  1. Celine Gauthier & David Tessier, 2002. "Supply Shocks and Real Exchange Rate Dynamics: Canadian Evidence," Working Papers 02-31, Bank of Canada.
  2. José García-Solanes & Jesús Rodríguez & José L. Torres, 2007. "Demand shocks and trade balance dynamics," Working Papers 07-04, Asociación Española de Economía y Finanzas Internacionales.
  3. Goo, Siwei & Siregar, Reza Y. Siregar, 2009. "Economic Shocks and Exchange Rate as a Shock Absorber in Indonesia and Thailand," MPRA Paper 16875, University Library of Munich, Germany.
  4. Tao Wang, 2004. "China: Sources of Real Exchange Rate Fluctuations," IMF Working Papers 04/18, International Monetary Fund.
  5. Agnieszka Stazka, 2006. "Sources of Real Exchange Rate Fluctuations in Central and Eastern Europe – Temporary or Permanent?," CESifo Working Paper Series 1876, CESifo Group Munich.
  6. Nadenichek, Jon, 2000. "The Japan-US trade imbalance: a real business cycle perspective," Japan and the World Economy, Elsevier, vol. 12(3), pages 255-271, September.
  7. Katie Farrant & Gert Peersman, 2005. "Accounting for the source of exchange rate movements: new evidence," Bank of England working papers 269, Bank of England.
  8. Frank Smets, 1997. "Financial asset prices and monetary policy: theory and evidence," BIS Working Papers 47, Bank for International Settlements.
  9. Dimitrios Malliaropulos & Ekaterini Panopoulou & Theologos Pantelidis & Nikitas Pittis, 2013. "Decomposing the persistence of real exchange rates," Empirical Economics, Springer, vol. 44(3), pages 1217-1242, June.
  10. Alexius, Annika, 2005. "Productivity shocks and real exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 555-566, April.
  11. Narayan, Paresh Kumar, 2008. "Estimating exchange rate responsiveness to shocks," Review of Financial Economics, Elsevier, vol. 17(4), pages 338-351, December.
  12. Rafiq, Sohrab, 2013. "Sources of time-varying trade balance and real exchange rate dynamics in East Asia," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 117-141.
  13. Alexius, Annika, 2000. "Supply Shocks and Real Exchange Rates," Working Paper Series 117, Sveriges Riksbank (Central Bank of Sweden).
  14. Wang, Tao, 2005. "Sources of real exchange rate fluctuations in China," Journal of Comparative Economics, Elsevier, vol. 33(4), pages 753-771, December.

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