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

See all articles by John Hunter

John Hunter

Brunel University - School of Social Science

Faek Menla Ali

University of Sussex -University of Sussex Business School

Date Written: March 14, 2014

Abstract

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

Hunter, John and Menla Ali, Faek, Money Demand Instability and Real Exchange Rate Persistence in the Monetary Model of USD-JPY Exchange Rate (March 14, 2014). Brunel University Working Paper No. 13-08. Available at SSRN: https://ssrn.com/abstract=2233579 or http://dx.doi.org/10.2139/ssrn.2233579

John Hunter

Brunel University - School of Social Science ( email )

Kingston Lane
Uxbridge, Middlesex UB8 3PH
United Kingdom
00-44-1895-266648 (Phone)

HOME PAGE: http://www.brunel.ac.uk/about/acad//sss/depts/economics/ef_staff/johnhunter

Faek Menla Ali (Contact Author)

University of Sussex -University of Sussex Business School ( email )

Falmer
Brighton, East Sussex BN1 9SL
United Kingdom

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