Real Exchange Rate Fluctuations and the Business Cycle: Evidence from Japan

34 Pages Posted: 15 Feb 2006  

Bankim Chadha

affiliation not provided to SSRN

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management; Cornell University - Department of Economics; Brookings Institution; NBER; IZA Institute of Labor Economics

Date Written: November 1996

Abstract

This paper analyzes the relationship between the real exchange rate and the business cycle in Japan during the floating rate period. A structural vector autoregression is used to identify different types of macroeconomic shocks that determine fluctuations in aggregate output and the real exchange rate. Relative nominal and real demand shocks are found to be the main determinants of variation in real exchange rate changes, while relative output growth is driven primarily by supply shocks. Historical decompositions suggest that the sharp appreciations of the yen in 1993 and 1995 and its subsequent depreciation can be attributed primarily to relative nominal shocks.

Keywords: Business cycle fluctuations, real effective exchange rate, structural vector autoregression

JEL Classification: F41, E32

Suggested Citation

Chadha, Bankim and Prasad, Eswar S., Real Exchange Rate Fluctuations and the Business Cycle: Evidence from Japan (November 1996). IMF Working Paper, Vol. , pp. 1-34, 1996. Available at SSRN: https://ssrn.com/abstract=883028

Bankim Chadha (Contact Author)

affiliation not provided to SSRN

No Address Available

Eswar S. Prasad

Cornell University - Dyson School of Applied Economics and Management ( email )

440 Warren Hall
Ithaca, NY 14853
United States

HOME PAGE: http://prasad.aem.cornell.edu

Cornell University - Department of Economics ( email )

414 Uris Hall
Ithaca, NY 14853-7601
United States

Brookings Institution ( email )

1775 Massachusetts Ave, NW
Washington, DC 20036
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NBER ( email )

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IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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