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

IMF Working Papers, June 1, 1995

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

Uses 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.
The approach 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.
Explicitly involves the use of a current account sustainability term, in contrast to much other empirical exchange rate modeling.

Reports significant, and sensible, long-run relationships for all of the currencies studied.
Reports appealing short-run dynamics for two of the currencies.
Finds that the Japanese effective exchange rate closely tracks the long-run exchange rate defined in this paper.

Combines asset market approach and balance of payments interactions.
Incorporates a current account sustainability term to augment standard PPP-based conditioning on relative prices.
Focuses on nominal effective exchange rates for the German mark, Japanese yen, and U.S. dollar under floating exchange rate regimes.

Subjects: 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