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Long swings in Japan’s current account and in the yen

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  • Müller-Plantenberg, Nikolas

    ()
    (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.)

Abstract

The yen has experienced several big swings over recent decades. This paper argues that the fluctuations of the Japanese exchange rate resulted mainly from corresponding movements in the current account, which affected the demand for yen relative to other currencies. The paper builds a vector error correction model for the exchange rate and the current account, based on the idea that the exchange rate and its economic fundamental do not move too far apart over time. In addition, the model allows for a Markov-switching stochastic trend in the current account. Regime changes occur at uncertain dates, possibly in response to exchange rate changes. Bayesian estimation proceeds using an innovative Gibbs-sampling procedure. The empirical results suggest that recurrent structural breaks in the yen’s fundamentals account for the large fluctuations of the Japanese exchange rate.

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Bibliographic Info

Paper provided by Universidad Autónoma de Madrid (Spain), Department of Economic Analysis (Economic Theory and Economic History) in its series Working Papers in Economic Theory with number 2012/08.

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Length: 35 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:uam:wpaper:201208

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Keywords: Japanese exchange rate; current account; exchange rate fundamental; Markov-switching; cointegration; Gibbs-sampling; purchasing power parity puzzle.;

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  1. Kenen,Peter B., 2000. "The International Economy," Cambridge Books, Cambridge University Press, number 9780521644358.
  2. Bauwens, Luc & Lubrano, Michel & Richard, Jean-Francois, 2000. "Bayesian Inference in Dynamic Econometric Models," OUP Catalogue, Oxford University Press, number 9780198773139, September.
  3. Nikolas Müller-Plantenberg, 2003. "Japan's Imbalance of Payments," CESifo Working Paper Series 1089, CESifo Group Munich.
  4. Christian B. Mulder & Matthieu Bussière, 1999. "External Vulnerability in Emerging Market Economies," IMF Working Papers 99/88, International Monetary Fund.
  5. Bauwens, Luc & Richard, Jean-Francois, 1985. "A 1-1 poly-t random variable generator with application to Monte Carlo integration," Journal of Econometrics, Elsevier, vol. 29(1-2), pages 19-46.
  6. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
  7. S. Illeris & G. Akehurst, 2001. "Introduction," The Service Industries Journal, Taylor & Francis Journals, vol. 21(1), pages 1-4, January.
  8. Lau, Evan & Baharumshah, Ahmad Zubaidi & Haw, Chan Tze, 2006. "Current account: mean-reverting or random walk behavior?," Japan and the World Economy, Elsevier, vol. 18(1), pages 90-107, January.
  9. Cheung, Yin-Wong & Wong, Clement Yuk-Pang, 2000. "A survey of market practitioners' views on exchange rate dynamics," Journal of International Economics, Elsevier, vol. 51(2), pages 401-419, August.
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