The exchange rate and long-run price movements in the US and Japan

Abstract

The close economic relationship between the US and Japan raises an interesting question about the effect of price movements in the US and Japan on the bilateral exchange rate. This paper investigates the long-run purchasing power parity between the US dollar and the Japanese yen. While earlier empirical studies often rejected the PPP hypothesis for the US and Japan, our results show that allowing measurement errors in price indices, the long-run PPP between the two countries is supported based on both the Engle-Granger and the Johansen cointegration tests.

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