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Exchange rate volatility and domestic consumption: Evidence from Japan

  • Bahmani-Oskooee, Mohsen
  • Xi, Dan

In 1952, Alexander provided an argument that since inflationary effects of depreciation could shift income from workers to producers it could lead to a decline in aggregate domestic consumption. This was based on the assumption that wages do not adjust fully to inflation and labor has a high MPC relative to that of the producers. In this paper, we argue that in addition to the exchange rate itself, exchange rate uncertainty could also affect domestic consumption. We demonstrate our conjecture by using quarterly data from Japan and a bounds testing approach that distinguishes the short run from the long run.

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File URL: http://www.sciencedirect.com/science/article/pii/S0939362512000313
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Article provided by Elsevier in its journal Economic Systems.

Volume (Year): 36 (2012)
Issue (Month): 2 ()
Pages: 326-335

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Handle: RePEc:eee:ecosys:v:36:y:2012:i:2:p:326-335
DOI: 10.1016/j.ecosys.2011.10.004
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  4. Koi Nyen Wong, 2008. "The effects of exchange rate variability on Malaysia's disaggregated electrical exports," Journal of Economic Studies, Emerald Group Publishing, vol. 35(2), pages 154-169, July.
  5. Mohsen Bahmani-Oskooee, 2007. "Exchange rate volatility and trade flows: a review article," Journal of Economic Studies, Emerald Group Publishing, vol. 34(3), pages 211-255, October.
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  9. Bahmani-Oskooee, Mohsen & Tankui, Altin, 2008. "The black market exchange rate vs. the official rate in testing PPP: Which rate fosters the adjustment process?," Economics Letters, Elsevier, vol. 99(1), pages 40-43, April.
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  12. M. Hashem Pesaran & Yongcheol Shin & Richard J. Smith, 2001. "Bounds testing approaches to the analysis of level relationships," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(3), pages 289-326.
  13. Ferda Halicioglu, 2007. "The J-curve dynamics of Turkish bilateral trade: a cointegration approach," Journal of Economic Studies, Emerald Group Publishing, vol. 34(2), pages 103-119, July.
  14. Mohsen Bahmani-Oskooee, 2009. "How stable is the demand for money in African countries?," Journal of Economic Studies, Emerald Group Publishing, vol. 36(3), pages 216-235, October.
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  17. Hall, Stephen G & Psaradakis, Zacharias & Sola, Martin, 1997. "Cointegration and Changes in Regime: The Japanese Consumption Function," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(2), pages 151-168, March-Apr.
  18. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
  19. Mohsen Bahmani-Oskooee & Massomeh Hajilee, 2010. "On the relation between currency depreciation and wages," Applied Economics Letters, Taylor & Francis Journals, vol. 17(6), pages 525-530.
  20. Robert E. Hall, 1986. "The Role of Consumption in Economic Fluctuations," NBER Chapters, in: The American Business Cycle: Continuity and Change, pages 237-266 National Bureau of Economic Research, Inc.
  21. Kugler, Peter, 1985. "Autoregressive Modelling of Consumption, Income, Inflation, and Interest Rate Data: A Multicountry Study," Empirical Economics, Springer, vol. 1(1), pages 37-50.
  22. Paresh Kumar Narayan, 2007. "Export-led growth hypothesis: evidence from Papua New Guinea and Fiji," Journal of Economic Studies, Emerald Group Publishing, vol. 34(4), pages 341-351, November.
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