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The rise of the yen vis-a-vis the "synthetic" euro: is it supported by economic fundamentals?

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  • Osbat, Chiara
  • Rüffer, Rasmus
  • Schnatz, Bernd

Abstract

This paper examines the long-run determinants of the euro-yen exchange rate. Using cointegration analysis, we find a consistent and significant relationship between the real exchange rate and relative productivity, the net foreign asset position, relative government spending and terms of trade shocks, as well as a fairly rapid mean reversion of the exchange rate to its equilibrium. The "equilibrium" rate tracks the trends in the actual exchange rate quite well, accounting for a large part of the yen appreciation from the mid-1970s to 2001. Our findings suggest that the euro appreciation against the yen in 2001 represented an equilibrium correction of its previous depreciation. Moreover, the width of the error bands highlights the difficulties arising when attempting to determine the precise equilibrium value of a currency. JEL Classification: F31, C32

Suggested Citation

  • Osbat, Chiara & Rüffer, Rasmus & Schnatz, Bernd, 2003. "The rise of the yen vis-a-vis the "synthetic" euro: is it supported by economic fundamentals?," Working Paper Series 224, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003224
    Note: 261931
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp224.pdf
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    References listed on IDEAS

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    4. Edison, Hali J & Melick, William R, 1999. "Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(2), pages 93-111, April.
    5. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
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    2. Yasser Abdih & Charalambos Tsangarides, 2010. "FEER for the CFA franc," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2009-2029.
    3. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    4. Campiche, Jody L. & Bryant, Henry L. & Richardson, James W. & Outlaw, Joe L., 2006. "An Analysis of Cointegration: Investigation of the Cost-Price Squeeze in Agriculture," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35357, Southern Agricultural Economics Association.
    5. Bouri, Elie & Jain, Anshul & Biswal, P.C. & Roubaud, David, 2017. "Cointegration and nonlinear causality amongst gold, oil, and the Indian stock market: Evidence from implied volatility indices," Resources Policy, Elsevier, vol. 52(C), pages 201-206.
    6. Xiaoshan Chen & Ronald MacDonald, 2010. "Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models," Working Papers 2010_16, Business School - Economics, University of Glasgow.
    7. Michael Sager, 2006. "Explaining the persistence of deviations from PPP: a non-linear Harrod-Balassa-Samuelson effect?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 41-61.

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    More about this item

    Keywords

    BEER; co-integration; equilibrium exchange rate; euro; Yen;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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