Money demand instability and real exchange rate persistence in the monetary model of USD–JPY exchange rate

This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability...

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Bibliographic Details
Published in:Economic modelling 2014-06, Vol.40, p.42-51
Main Authors: Hunter, John, Menla Ali, Faek
Format: Article
Language:English
Subjects:
Capital movement
Cointegration
Demand for money
Dollar
Economic theory
Exchange rates
Foreign exchange rates
Government spending
Monetary model
Monetary theory
Productivity
Public expenditure
Stock prices
Studies
Weak exogeneity
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Summary:This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative government spending, and real oil price to explain real exchange rate persistence. By using quarterly data over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the proposed hybrid model provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed to the conventional monetary model. •We propose a hybrid monetary model of the dollar–yen exchange rate.•The inadequacy of the monetary model is due to the breakdown of its building-blocks.•The hybrid model provides a coherent long-run relation to explain the exchange rate.
ISSN:0264-9993
1873-6122
DOI:10.1016/j.econmod.2014.03.019