Explaining long term exchange rate behavior in the United States and Japan
Conventional exchange rate models are based on the fundamental hypothesis that, in the long run, real exchange rates will move in such a way as to make countries equally competitive. Thus they assume that in the long run, trade between countries will be roughly balanced. The difficulty in assessing expectations about the consequences of trade arrangements (such as NAFTA or the EEC), is that these models perform quite poorly at an empirical level, making them an unreliable guide to economic policy. To have a sound foundation for economic policy requires operating from a theoretically grounded explanation of exchange rates that works well across a spectrum of developed and developing countries. This paper applies the theoretical and empirical foundation developed in Shaikh (1980,1991,1995), and previously applied to Spain, Mexico and Greece (Roman 1997, Ruiz-Napoles 1996, Antonopoulos 1997), to the explanation of the exchange rates of the United States and Japan. Such a framework implies that it is a country's competitive position, as measured by the real unit costs of its tradables, which determines its real exchange rate. This determination of real exchange rates through real unit costs provides a possible explanation for why trade imbalances remain persistent, as well as a policy rule-of-thumb for sustainable exchange rates. The aim is to show that a theoretically grounded, empirically robust, explanation of real exchange rate movements can be constructed that also can be of practical use to researchers and policy makers.
|Date of creation:||25 Sep 1998|
|Date of revision:|
|Note:||Type of Document - Acrobat PDF; prepared on IBM PC ; to print on PostScript; pages: 30; figures: included|
|Contact details of provider:|| Web page: http://econwpa.repec.org|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Kenneth A. Froot & Kenneth Rogoff, 1994.
"Perspectives on PPP and Long-Run Real Exchange Rates,"
NBER Working Papers
4952, National Bureau of Economic Research, Inc.
- Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier.
- Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
- Bienenfeld, Mel, 1988. "Regularity in Price Changes as an Effect of Changes in Distribution," Cambridge Journal of Economics, Oxford University Press, vol. 12(2), pages 247-55, June.
- Kenneth Rogoff, 1996. "The Purchasing Power Parity Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(2), pages 647-668, June.
- Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
- Dornbusch, Rudiger, 1989.
" Real Exchange Rates and Macroeconomics: A Selective Survey,"
Scandinavian Journal of Economics,
Wiley Blackwell, vol. 91(2), pages 401-32.
- Rudiger Dornbusch, 1988. "Real Exchange Rates and Macroeconomics: A Selective Survey," NBER Working Papers 2775, National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpma:9809011. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (EconWPA)
If references are entirely missing, you can add them using this form.