Predictable Movements in Yen/DM Exchange Rates

Janet Kong

No 2000/143, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the relevance of PPP, the adjustment channel of real exchange rate and the predictability of the movement in nominal exchange rate by studying the behavior of yen/DM exchange rate, using cointegration method. Results support PPP and find that the real exchange rate is mean-reverting. The change in the nominal exchange rate exhibits significant auto-regressive property. These findings imply that movements in the nominal yen/DM exchange rate is actually predictable. The error-correction model and a simple first order autoregressive model both outperform the random walk model in out-of-sample forecasting.

Keywords: WP; exchange rate; PPP; exchange rate forecast; market PPP hypothesis; long-run PPP; deutsche mark; export price index; auto regression; PPP exchange rate; exchange-rate movement; Exchange rates; Purchasing power parity; Real exchange rates; Wholesale price indexes; Export price indexes (search for similar items in EconPapers)
Pages: 36
Date: 2000-08-01
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