An Equilibrium Foundation of the Soros Chart

Takashi Kano and Hiroshi Morita

No e079, Working Papers from Tokyo Center for Economic Research

Abstract: The most prominent characteristic of the Japanese yen/U.S. dollar nominal exchange rate in the post-Plaza Accord era is its near random-walk behavior sharing a common stochastic trend with the monetary base differential, which is augmented by the excess reserves, between Japan and the United States. In this paper, we develop a simple two-country incomplete-market model equipped with a specification of domestic reserve markets to structurally investigate this anecdotal evidence known as the Soros chart. In this model, we theoretically verify that a market discount factor close to one generates near random-walk behavior of an equilibrium nominal exchange rate in accordance with a permanent I(1) component of the augmented monetary base differential as an economic fundamental. Results of a Bayesian posterior simulation with post-Plaza Accord data of Japan and the United States plausibly support our model as a data generating process of the Japanese yen/U.S. dollar exchange rate.

Pages: 33 pages
Date: 2014-05
New Economics Papers: this item is included in nep-mon and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: An equilibrium foundation of the Soros chart (2015)
Working Paper: An Equilibrium Foundation of the Soros Chart (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:tcr:wpaper:e79

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