The Rise of the Yen Vis-a-Vis the ('Synthetic') Euro: Is it Supported by Economic Fundamentals?

41 Pages Posted: 6 Jun 2003

See all articles by Chiara Osbat

Chiara Osbat

European Central Bank (ECB)

Rasmus Rueffer

European Central Bank (ECB)

Bernd Schnatz

European Central Bank (ECB)

Date Written: April 2003

Abstract

This paper examines the long-run determinants of the euro-yen exchange rate. Using cointegration analysis, we find a consistent and significant relationship between the real exchange rate and relative productivity, the net foreign asset position, relative government spending and terms of trade shocks, as well as a fairly rapid mean reversion of the exchange rate to its equilibrium. The "equilibrium" rate tracks the trends in the actual exchange rate quite well, accounting for a large part of the yen appreciation from the mid-1970s to 2001. Our findings suggest that the euro appreciation against the yen in 2001 represented an equilibrium correction of its previous depreciation. Moreover, the width of the error bands highlights the difficulties arising when attempting to determine the precise equilibrium value of a currency.

Keywords: Yen, Euro, equilibrium exchange rate, BEER, cointegration

JEL Classification: F31, C32

Suggested Citation

Osbat, Chiara and Rueffer, Rasmus and Schnatz, Bernd, The Rise of the Yen Vis-a-Vis the ('Synthetic') Euro: Is it Supported by Economic Fundamentals? (April 2003). Available at SSRN: https://ssrn.com/abstract=411587 or http://dx.doi.org/10.2139/ssrn.411587

Chiara Osbat

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6821 (Phone)
+49 69 1344 6000 (Fax)

Rasmus Rueffer

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 7087 (Phone)
+49 69 1344 6353 (Fax)

Bernd Schnatz (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
069-1344-6517 (Phone)

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