## Real Exchange Rate Fluctuations and the Business Cycle: Evidence From Japan

_IMF Working Papers, November 1, 1996_

## Source details

**Canonical URL:** [Real Exchange Rate Fluctuations and the Business Cycle: Evidence From Japan](https://www.imf.org/en/publications/wp/issues/2016/12/30/real-exchange-rate-fluctuations-and-the-business-cycle-evidence-from-japan-1906)

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## Bibliographic details
- Authors: Eswar S Prasad, Bankim Chadha
- Published: November 1, 1996
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451855333.001

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### Overview
- Paper analyzes the relationship between the real exchange rate and the business cycle in Japan during the floating rate period.
- Uses a structural vector autoregression to identify different types of macroeconomic shocks that determine fluctuations in aggregate output and the real exchange rate.
- Summary finding: relative nominal and real demand shocks are the main determinants of variation in real exchange rate changes, while relative output growth is driven primarily by supply shocks.
- Historical decompositions indicate that the sharp appreciations of the yen in 1993 and 1995 and its subsequent depreciation can be attributed primarily to relative nominal shocks.

### Methodology
- Empirical approach: structural vector autoregression (SVAR) to identify macroeconomic shocks affecting aggregate output and the real exchange rate.
- Focus: disentangling relative nominal shocks, relative real demand shocks, and supply shocks in driving exchange rate and output fluctuations.

### Key Findings
- Determinants of real exchange rate changes:
  - Relative nominal shocks: main determinant.
  - Relative real demand shocks: also a primary determinant.
- Determinants of relative output growth:
  - Supply shocks: primary driver.
- Historical episodes:
  - Sharp appreciations of the yen in 1993 and 1995 and the subsequent depreciation are attributed primarily to relative nominal shocks.

### Policy-Relevant Implications (inferred from findings)
- Exchange rate volatility during the floating rate period is closely linked to nominal and demand-side shocks, suggesting policy attention to nominal stability and demand management to mitigate real exchange rate swings.
- Output dynamics are largely supply-driven, highlighting the role of supply-side policies in stabilizing relative output growth.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/30/real-exchange-rate-fluctuations-and-the-business-cycle-evidence-from-japan-1906_