IDEAS home Printed from https://ideas.repec.org/p/ecb/ecbwps/2003224.html
   My bibliography  Save this paper

The rise of the yen vis-a-vis the "synthetic" euro: is it supported by economic fundamentals?

Author

Listed:
  • Osbat, Chiara
  • Rüffer, Rasmus
  • Schnatz, Bernd

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. JEL Classification: F31, C32

Suggested Citation

  • Osbat, Chiara & Rüffer, Rasmus & Schnatz, Bernd, 2003. "The rise of the yen vis-a-vis the "synthetic" euro: is it supported by economic fundamentals?," Working Paper Series 224, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2003224
    Note: 261931
    as

    Download full text from publisher

    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp224.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2001. "The external wealth of nations: measures of foreign assets and liabilities for industrial and developing countries," Journal of International Economics, Elsevier, vol. 55(2), pages 263-294, December.
    2. repec:bla:jecsur:v:12:y:1998:i:5:p:533-72 is not listed on IDEAS
    3. Cheung, Yin-Wong & Lai, Kon S, 1993. "Finite-Sample Sizes of Johansen's Likelihood Ration Tests for Conintegration," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 55(3), pages 313-328, August.
    4. Edison, Hali J & Melick, William R, 1999. "Alternative Approaches to Real Exchange Rates and Real Interest Rates: Three Up and Three Down," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(2), pages 93-111, April.
    5. Henrik Hansen & Søren Johansen, 1999. "Some tests for parameter constancy in cointegrated VAR-models," Econometrics Journal, Royal Economic Society, vol. 2(2), pages 306-333.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Chen, Xiaoshan & MacDonald, Ronald, 2010. "Revisiting the Dollar-Euro Permanent Equilibrium Exchange Rate: Evidence from Multivariate Unobserved Components Models," SIRE Discussion Papers 2010-41, Scottish Institute for Research in Economics (SIRE).
    2. Alsayed, Hamad & McGroarty, Frank, 2012. "Arbitrage and the Law of One Price in the market for American depository receipts," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1258-1276.
    3. Yasser Abdih & Charalambos Tsangarides, 2010. "FEER for the CFA franc," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2009-2029.
    4. Rebecca L Driver & Peter F Westaway, 2005. "Concepts of equilibrium exchange rates," Bank of England working papers 248, Bank of England.
    5. Campiche, Jody L. & Bryant, Henry L. & Richardson, James W. & Outlaw, Joe L., 2006. "An Analysis of Cointegration: Investigation of the Cost-Price Squeeze in Agriculture," 2006 Annual Meeting, February 5-8, 2006, Orlando, Florida 35357, Southern Agricultural Economics Association.
    6. Bouri, Elie & Jain, Anshul & Biswal, P.C. & Roubaud, David, 2017. "Cointegration and nonlinear causality amongst gold, oil, and the Indian stock market: Evidence from implied volatility indices," Resources Policy, Elsevier, vol. 52(C), pages 201-206.
    7. Michael Sager, 2006. "Explaining the persistence of deviations from PPP: a non-linear Harrod-Balassa-Samuelson effect?," Applied Financial Economics, Taylor & Francis Journals, vol. 16(1-2), pages 41-61.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Brissimis, Sophocles N. & Kosma, Theodora, 2005. "Market power, innovative activity and exchange rate pass-through in the euro area," Working Paper Series 531, European Central Bank.
    2. N Fiess & M Fugazza & WF Maloney, 2006. "Informal Labor Markets and Macroeconomic Fluctuations," Working Papers 2006_17, Business School - Economics, University of Glasgow.
    3. Maurice Obstfeld & Alan M. Taylor, 2003. "Globalization and Capital Markets," NBER Chapters, in: Globalization in Historical Perspective, pages 121-188, National Bureau of Economic Research, Inc.
    4. Papież, Monika & Śmiech, Sławomir, 2015. "Dynamic steam coal market integration: Evidence from rolling cointegration analysis," Energy Economics, Elsevier, vol. 51(C), pages 510-520.
    5. Franz Seitz & Julian von Landesberger, 2014. "Household Money Holdings in the Euro Area: An Explorative Investigation," Journal of Banking and Financial Economics, University of Warsaw, Faculty of Management, vol. 2(2), pages 83-115, November.
    6. Baharumshah, Ahmad Zubaidi & Masih, A. Mansur M., 2005. "Current account, exchange rate dynamics and the predictability: the experience of Malaysia and Singapore," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(3), pages 255-270, July.
    7. Philip Arestis & Ambika D. Luintel & Kul B. Luintel, 2004. "Does Financial Structure Matter?," Finance 0401006, University Library of Munich, Germany.
    8. Byrne, Joseph P. & Nagayasu, Jun, 2010. "Structural breaks in the real exchange rate and real interest rate relationship," Global Finance Journal, Elsevier, vol. 21(2), pages 138-151.
    9. Giorgio Canarella & Stephen M. Miller & Stephen K. Pollard, 2008. "Dynamic Stock Market Interactions between the Canadian, Mexican, and the United States Markets: The NAFTA Experience," Working papers 2008-49, University of Connecticut, Department of Economics.
    10. Franz Seitz & Julian von Landesberger, 2012. "Household Money Demand: The Euro Area Case," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 148(III), pages 409-438, September.
    11. Peia, Oana & Roszbach, Kasper, 2015. "Finance and growth: Time series evidence on causality," Journal of Financial Stability, Elsevier, vol. 19(C), pages 105-118.
    12. Mariam Camarero & Javier Ordóñez & Cecilio Tamarit, 2002. "The Euro-Dollar exchange rate: Is it fundamental?," European Economy Group Working Papers 16, European Economy Group.
    13. Sophocles N. Brissimis & Theodora S. Kosma, 2006. "Market Conduct, Price Interdependence and Exchange Rate Pass-Through," Working Papers 51, Bank of Greece.
    14. Weber, Enzo, 2007. "What happened to the transatlantic capital market relations?," SFB 649 Discussion Papers 2007-014, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    15. Sophocles N. Brissimis & Theodora S. Kosma, 2005. "Market Power, Innovative Activity and Exchange Rate Pass-Through," Working Papers 22, Bank of Greece.
    16. Weber, Enzo, 2011. "What happened to the transatlantic capital market relations?," Economic Modelling, Elsevier, vol. 28(3), pages 877-884, May.
    17. Schindler, Felix & Voronkova, Svitlana, 2010. "Linkages between international securitized real estate markets: Further evidence from time-varying and stochastic cointegration," ZEW Discussion Papers 10-051, ZEW - Leibniz Centre for European Economic Research.
    18. Xiaojie Xu, 2018. "Cointegration and price discovery in US corn cash and futures markets," Empirical Economics, Springer, vol. 55(4), pages 1889-1923, December.
    19. Benjamin Leiva & Mar Rubio-Varas, 2020. "The Energy and Gross Domestic Product Causality Nexus in Latin America 1900-2010," International Journal of Energy Economics and Policy, Econjournals, vol. 10(1), pages 423-435.
    20. A. F. Darrat & D. A. Yousef, 2004. "Fertility, human capital, and macroeconomic performance: long-term interactions and short-run dynamics," Applied Financial Economics, Taylor & Francis Journals, vol. 14(8), pages 537-554.

    More about this item

    Keywords

    BEER; co-integration; equilibrium exchange rate; euro; Yen;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ecb:ecbwps:2003224. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Official Publications (email available below). General contact details of provider: https://edirc.repec.org/data/emieude.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.