Money Demand Instability and Real Exchange Rate Persistence in the Monetary Model of USD-JPY Exchange Rate
Brunel University Working Paper No. 13-08
42 Pages Posted: 22 Apr 2013 Last revised: 15 Mar 2014
Date Written: March 14, 2014
This paper proposes a hybrid monetary model of the dollar-yen exchange rate that takes into account factors affecting the conventional monetary model’s building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar-yen exchange rate as opposed to the conventional monetary model.
Keywords: Cointegration, Exchange rates, Monetary model, Weak exogeneity
JEL Classification: C22, F31, F36
Suggested Citation: Suggested Citation