Exchange Rate Determination with Systematic and Unsystematic Policy Regime Changes: Evidence from the Yen/Dollar Rate

23 Pages Posted: 23 Apr 2004

See all articles by John H. Makin

John H. Makin

American Enterprise Institute (AEI); National Bureau of Economic Research (NBER)

Raymond D. Sauer

Clemson University - John E. Walker Department of Economics; National Bureau of Economic Research (NBER)

Date Written: July 1984

Abstract

This paper presents results of estimating an exchange rate equation in light of theoretical considerations regarding changes in sterilization and intervention policy and tax policy which imply that the coefficients in the equation will not behave as fixed parameters in a given sample period,as standard econometric practice assumes. We compare the results of ordinary least squares and a random coefficients model of the Japanese Yen-- U.S. dollar exchange rate during the floating period of July 1973 through June 1982.When systematic end of year policy changes affecting Japanese reserves are explicitly modeled, both OLS and the random coefficients model show increased explanatory power. The random coefficients model appears to be superior to OLS however; by allowing the coefficients to vary over time as required by the economic theory discussed above, estimates of the mean response coefficients for the floating period all have the hypothesized sign, and explanatory power is sharply increased.

Suggested Citation

Makin, John and Sauer, Raymond D. oSkipo, Exchange Rate Determination with Systematic and Unsystematic Policy Regime Changes: Evidence from the Yen/Dollar Rate (July 1984). NBER Working Paper No. w1406. Available at SSRN: https://ssrn.com/abstract=227488

John Makin (Contact Author)

American Enterprise Institute (AEI) ( email )

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National Bureau of Economic Research (NBER)

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Raymond D. oSkipo Sauer

Clemson University - John E. Walker Department of Economics ( email )

Clemson, SC 29634
United States
864-656-3939 (Phone)
864-656-4192 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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