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Exchange Rates and Foreign Trade - An Example Involving Japan and the USA

Author

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  • Jiøí Jaroš

Abstract

The aim of this paper is to challenge the widely made claim that a weaker currency will automatically improve the current-account balance. Its objective is to present the puzzling fact that, for an open economy, a current-account reaction to nominal exchange rate changes cannot be identified. American politicians often use this incorrect interpretation as part of a protectionist-trade strategy to force the Japanese yen higher, the author claims. Two simple models accompanied by empirical evidence are presented to illustrate the effect of such a faulty notion. The results indicate that enormous fluctuations of the yen exchange rate led the Bank of Japan to adjust its monetary policy, which have pushed the yen into its present (at the writing of this paper) deflationary spiral.

Suggested Citation

  • Jiøí Jaroš, 2000. "Exchange Rates and Foreign Trade - An Example Involving Japan and the USA," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 50(10), pages 523-538, October.
    • Handle: RePEc:fau:fauart:v:50:y:2000:i:10:p:523-538
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    File URL: http://journal.fsv.cuni.cz/mag/article/show/id/671
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    More about this item

    Keywords

    Japan; current account; exchange rate;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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