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Real Exchange Rate Fluctuations and the Business Cycle; Evidence From Japan

Author

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  • Eswar S Prasad
  • Bankim Chadha

Abstract

This paper analyzes the relationship between the real exchange rate and the business cycle in Japan during the floating rate period. A structural vector autoregression is used to identify different types of macroeconomic shocks that determine fluctuations in aggregate output and the real exchange rate. Relative nominal and real demand shocks are found to be the main determinants of variation in real exchange rate changes, while relative output growth is driven primarily by supply shocks. Historical decompositions suggest that the sharp appreciations of the yen in 1993 and 1995 and its subsequent depreciation can be attributed primarily to relative nominal shocks.

Suggested Citation

  • Eswar S Prasad & Bankim Chadha, 1996. "Real Exchange Rate Fluctuations and the Business Cycle; Evidence From Japan," IMF Working Papers 96/132, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:96/132
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    Cited by:

    1. Katie Farrant & Gert Peersman, 2005. "Accounting for the source of exchange rate movements: new evidence," Bank of England working papers 269, Bank of England.
    2. Celine Gauthier & David Tessier, 2002. "Supply Shocks and Real Exchange Rate Dynamics: Canadian Evidence," Staff Working Papers 02-31, Bank of Canada.
    3. Britta Gehrke & Fang Yao, 2016. "Persistence and volatility of real exchange rates: the role of supply shocks revisited," Reserve Bank of New Zealand Discussion Paper Series DP2016/02, Reserve Bank of New Zealand.
    4. Narayan, Paresh Kumar, 2008. "Estimating exchange rate responsiveness to shocks," Review of Financial Economics, Elsevier, vol. 17(4), pages 338-351, December.
    5. Imed Drine & Christophe Rault, 2009. "Une analyse économétrique des sources de fluctuations du taux de change réel dans trois pays en développement. Le cas du Maroc, des Philippines et de l'Uruguay," Revue économique, Presses de Sciences-Po, vol. 60(6), pages 1421-1453.
    6. Rafiq, Sohrab, 2013. "Sources of time-varying trade balance and real exchange rate dynamics in East Asia," Journal of the Japanese and International Economies, Elsevier, vol. 29(C), pages 117-141.
    7. Frank Smets, 1997. "Financial-asset Prices and Monetary Policy: Theory and Evidence," RBA Annual Conference Volume,in: Philip Lowe (ed.), Monetary Policy and Inflation Targeting Reserve Bank of Australia.
    8. José García-Solanes & Jesús Rodríguez-López & José Torres, 2011. "Demand Shocks and Trade Balance Dynamics," Open Economies Review, Springer, vol. 22(4), pages 739-766, September.
    9. Dimitrios Malliaropulos & Ekaterini Panopoulou & Theologos Pantelidis & Nikitas Pittis, 2013. "Decomposing the persistence of real exchange rates," Empirical Economics, Springer, vol. 44(3), pages 1217-1242, June.
    10. Agnieszka Stazka, 2006. "Sources of Real Exchange Rate Fluctuations in Central and Eastern Europe – Temporary or Permanent?," CESifo Working Paper Series 1876, CESifo Group Munich.
    11. Siwei Goo & Reza Siregar, 2009. "Economic Shocks And Exchange Rate As A Shock Absorber In Indonesia And Thailand," Staff Papers, South East Asian Central Banks (SEACEN) Research and Training Centre, number sp72, April.
    12. Nadenichek, Jon, 2000. "The Japan-US trade imbalance: a real business cycle perspective," Japan and the World Economy, Elsevier, vol. 12(3), pages 255-271, September.
    13. repec:eee:jimfin:v:79:y:2017:i:c:p:99-114 is not listed on IDEAS
    14. Alexius, Annika, 2005. "Productivity shocks and real exchange rates," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 555-566, April.
    15. Tao Wang, 2004. "China; Sources of Real Exchange Rate Fluctuations," IMF Working Papers 04/18, International Monetary Fund.
    16. Hyeon-seung Huh & Won Soon Kwon, 2015. "Sources of Fluctuations in the Real Exchange Rates and Trade Balances of the G-7: A Sign Restriction VAR Approach," Review of International Economics, Wiley Blackwell, vol. 23(4), pages 715-737, September.
    17. Wang, Tao, 2005. "Sources of real exchange rate fluctuations in China," Journal of Comparative Economics, Elsevier, vol. 33(4), pages 753-771, December.
    18. Hoffmann, M. & MacDonald, R., 2001. "A real differential view of equilibrium real exchange rate," Discussion Paper Series In Economics And Econometrics 103, Economics Division, School of Social Sciences, University of Southampton.
    19. Meng, Xiangcai & Huang, Chia-Hsing, 2016. "Nonlinear models for the sources of real effective exchange rate fluctuations: Evidence from the Republic of Korea," Japan and the World Economy, Elsevier, vol. 40(C), pages 21-30.
    20. Biswajit Maitra, 2016. "Monetary, Real Shocks And Exchange Rate Variations In India," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 41(1), pages 81-103, March.
    21. Alexius, Annika, 2000. "Supply Shocks and Real Exchange Rates," Working Paper Series 117, Sveriges Riksbank (Central Bank of Sweden).

    More about this item

    Keywords

    Japan; Business cycle fluctuations; real effective exchange rate; structural vector autoregression; exchange rate; real exchange rate; effective exchange rate; error variance;

    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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