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The Behaviour of Real Exchange Rates: The Case of Japan

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  • Ming-Jen Chang
  • Chang-Ching Lin
  • Shou-Yung Yin

Abstract

The study examines the convergence rate of mean reversion by contrasting the estimated half-life of real exchange rate (RER). We employ an extensive monthly consumer price index (CPI)-based product price’s panel for Japan (the U.S. as the num´eraire). We find that the disaggregated RERs are persistent due to the cross-sectional dependence problems. By controlling common correlated effects, the estimated half-life for all goods may fall to as low as 2.54 years, below the consensus view of 3 to 5 years summarized by Rogoff (1996). After correcting the small-sample bias, the estimated half-life of deviations from purchasing power parity (PPP) increase by 1.03 year. Our findings also support that the half-life of mean reversion of RER is about 3.55 years for traded goods, about 0.11 year lower than non-traded goods. We also show that traded goods and non-traded goods perform distinct distributions of persistence.
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  • Ming-Jen Chang & Chang-Ching Lin & Shou-Yung Yin, 2013. "The Behaviour of Real Exchange Rates: The Case of Japan," Pacific Economic Review, Wiley Blackwell, vol. 18(4), pages 530-545, October.
    • Handle: RePEc:bla:pacecr:v:18:y:2013:i:4:p:530-545
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    File URL: http://hdl.handle.net/10.1111/1468-0106.12036
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    Cited by:

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    2. Vinh Q. T. Dang & Yu (Alan) Yang, 2017. "Assessing Market Integration in ASEAN with Retail Price Data," Pacific Economic Review, Wiley Blackwell, vol. 22(4), pages 510-532, October.

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    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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