International parity relationships between the USA and Japan

Juselius, K. and MacDonald, R. (2004) International parity relationships between the USA and Japan. Japan and the World Economy, 16(1), pp. 17-34. (doi:10.1016/S0922-1425(03)00003-3)

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Based on multivariate cointegration analysis we show that key parity conditions between the USA and Japan do not hold as stationary relations and that this is related to the nonstationarity of the real exchange rate. The latter seems almost exclusively to be related to similar nonstationary movements in interest rates. We obtain strong empirical results suggesting a reversal of the standard linkages, as predicted by the term structure of interest rates and the Fisher condition, between short and long interest rates and interest rates and inflation. Our findings may be important for the conduct of monetary policy, which is usually thought to be transmitted through short-term interest rates. Altogether, the empirical results suggest that it is agents’ behavior in the foreign exchange market, rather than in the goods market, which is crucial for the determination of the exchange rate.

Item Type:Articles
Glasgow Author(s) Enlighten ID:Juselius, Prof Katarina and MacDonald, Professor Ronald
Authors: Juselius, K., and MacDonald, R.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Japan and the World Economy
Published Online:15 February 2003

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