Dynamics of the yen-dollar real exchange rate and the US-Japan real trade balance

Abstract

This paper employs cointegration and error correction models to examine the dynamics of the yen-dollar real exchange rate and the US-Japan real trade balance. It uses quarterly data from 1973.I–1993.IV. The unit root tests reveal non-stationarity in both the variables. The ADF test fails to affirm any long-run association between the yen-dollar real exchange rate and the US-Japan real trade balance. Also, there is evidence of bidirectional short-run Granger causality between these two variables with mutual feedbacks.