Asset Market and Balance of Payments Characteristics: An Eclectic Exchange Rate Model for the Dollar, Mark, and Yen

June 1, 1995

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Format: Chicago

Ronald MacDonald. Asset Market and Balance of Payments Characteristics: An Eclectic Exchange Rate Model for the Dollar, Mark, and Yen, (USA: International Monetary Fund, 1995) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

In this paper we use an exchange rate model that combines asset market characteristics with balance of payments interactions to examine the nominal effective exchange rates of the German mark, Japanese yen, and U.S. dollar for the recent experience with floating exchange rates. Our approach may be interpreted as one which attempts to flesh out the missing links that arise in conditioning an exchange rate solely on relative prices, as occurs in a standard PPP analysis. In contrast to much other empirical exchange rate modeling, our approach explicitly involves the use of a current account sustainability term. Amongst the findings reported in this paper are: significant, and sensible, long-run relationships for all of the currencies studied; appealing short-run dynamics for two of the currencies; and a finding that the Japanese effective exchange rate closely tracks the long-run exchange rate defined in this paper.

Subject: Exchange rate assessments, Exchange rate modelling, Exchange rates, Foreign exchange, Purchasing power parity, Real exchange rates

Keywords: Asset market approach, Balance of payments, Correlation coefficient, Critical value, Excess demand, Exchange rate assessments, Exchange rate depreciation, Exchange rate modelling, Exchange rates, Mn mathvariant, Modeling exercise, Nominal exchange rate movement, Parsimonious exchange rate model, Price configuration, Price level, Purchasing power parity, Real exchange rates, Short-run exchange rate change, Time series, U.S. dollar, WP

Publication Details

Pages:

38
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1995/055
Stock No:

WPIEA0551995
ISBN:

9781451847581
ISSN:

1018-5941

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