Is the Yen/Dollar Exchange Rate Really Responsible for East Asia's Export and Business Cycles? A Commentary on

Masanaga Kumakura

The World Economy, 2005, vol. 28, issue 10, 1509-1537

Abstract: In a paper published in The World Economy, Ronald McKinnon and Gunther Schnabl claim that fluctuations in the nominal yen/dollar exchange rate are the principal causal factor behind the export and business cycles in East Asian countries (McKinnon and Schnabl, 2003). Their econometric work, however, suffers from at least two important difficulties. First, while McKinnon and Schnabl preclude industry shocks as an explanation for the East Asian countries’ macroeconomic fluctuations, cyclical fluctuations in the global electronics industry have a significant impact on their short‐run export and output dynamics. Second, although McKinnon and Schnabl assume that the relative industrial competitiveness of Japan and other East Asian countries moves in tandem with fluctuations in the nominal yen/dollar exchange rate, the empirical validity of this assumption is not indisputable. Once these two issues are taken into account properly, it becomes very difficult to make a convincing case for the yen/dollar exchange rate being the main driver of East Asia's macroeconomic instability. A brief critique will also be made of another paper that has appeared recently in The World Economy (Doraisami, 2004), which models Malaysia's pre‐crisis export dynamics using the nominal yen/dollar exchange rate as a proxy for the country's export competitiveness.

Date: 2005
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