||THREE ALTERNATIVE HYPOTHESES ON THE YEN-DOLLAR EXCHANGE RATE OVER THE LAST 30 YEARS
Honda, YuzoInoue, Hitoshi
Discussion Papers In Economics And Business
33 , 2015-06 , Graduate School of Economics and Osaka School of International Public Policy (OSIPP) Osaka University
We empirically investigate the dynamic nature of three alternative hypotheses on the foreign exchange rate between the Japanese yen and US dollar in a multivariate context, using data from April 1985 to October 2014. The three hypotheses are the uncovered interest rate parity hypothesis, the current account hypothesis, and the quasi purchasing power parity hypothesis. Each hypothesis has significant influence on the yen–dollar exchange rate. Furthermore, it takes two to three years for the yield spread between the yen and dollar to have its largest impact on the exchange rate. In addition, the effects of unexpected shocks to the exchange rate on the export price ratio and current account are long lasting.