DP1639 On the Japanese Yen-US Dollar Exchange Rate: A Structural Econometric Model Based on Real Interest Differentials

Author(s):	Ronald MacDonald
Publication Date:	April 1997
Keyword(s):	Co Integration, Econometric Modelling, Exchange Rates
JEL(s):	F31
Programme Areas:	International Macroeconomics
Link to this Page:	cepr.org/active/publications/discussion_papers/dp.php?dpno=1639

In this paper the short- and long-run movements of the Japanese yen-US dollar exchange rate are modelled for the recent floating period. The modern general-to-specific approach is used as our econometric framework. In contrast to some other exchange rate studies, we interpret multiple cointegrating vectors using economic theory. Among the findings are sensible and significant long-run relationships, and dynamic equations which describe the movements of the exchange rate and satisfy a battery of diagnostic tests. The models are shown to produce good in-sample forecasting performance and also out-of-sample forecasting performance which dominates a random walk.