Whither the yen? Implications of an intertemporal model of the dollar/yen rate

This article documents the evidence for a fiscal model of the dollar/yen real exchange rate over the period 1974-1995. Cointegrating relationships between the real exchange rate and productivity, government spending, and the real price of oil are estimated using the Johansen (1988) and Stock-Watson (1993) procedures. The neoclassical fixed-factors fiscal model of Rogoff (1992) is found to have some substantiation in the data. Estimates of the long-run equilibrium exchange rate indicate an overvaluation of approximately 16% at an exchange rate of 85 yen to the dollar in mid-1995. J. Japan Int Econ., June 1997, 11(2), pp. 228-246. Department of Economics, University of California, Santa Cruz, California 95064. (C) 1997 Academic Press.