The Equilibrium Yen–Dollar Rate: 1976–91
This paper presents a definition of the equilibrium exchange rate that is based on a modified version of purchasing power parity (PPP) for traded goods. Employing constant elasticity of substitution (CES) production functions and data from 28 three-digit international standard industrial classification (ISIC) manufacturing industries, the equilibrium Yen-Dollar rate is calculated for the period between 1976 and 1991 (a time in which the Yen appreciated markedly against the Dollar) showing that the actual Yen-Dollar rate closely tracked the equilibrium rate over that time. The results suggest that strong growth in Japanese labor productivity, coupled with Japan’s relatively low capital-labor elasticity of sub-stitution, were the main contributors to the Yen’s long-run appreciation.
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Document Type: Research Article
Affiliations: The Research Institute of the Finnish Economy
Publication date: March 1, 2002