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The Equilibrium Yen–Dollar Rate: 1976–91
Author(s) -
De Carvalho Anthony
Publication year - 2002
Publication title -
asian economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.345
H-Index - 28
eISSN - 1467-8381
pISSN - 1351-3958
DOI - 10.1111/1467-8381.00142
Subject(s) - economics , purchasing power parity , liberian dollar , exchange rate , elasticity of substitution , monetary economics , elasticity (physics) , capital (architecture) , econometrics , production (economics) , macroeconomics , thermodynamics , physics , finance , history , archaeology
This paper presents a definition of the equilibrium exchange rate that is based on a modified version of purchasing power parity (PPP) for traded goods. Employing constant elasticity of substitution (CES) production functions and data from 28 three‐digit international standard industrial classification (ISIC) manufacturing industries, the equilibrium Yen‐Dollar rate is calculated for the period between 1976 and 1991 (a time in which the Yen appreciated markedly against the Dollar) showing that the actual Yen‐Dollar rate closely tracked the equilibrium rate over that time. The results suggest that strong growth in Japanese labor productivity, coupled with Japan’s relatively low capital‐labor elasticity of sub‐stitution, were the main contributors to the Yen’s long‐run appreciation.