Money, exchange rates and international business cycle between Japan and the United States

Abstract

This paper focuses on the international business cycle repercussions between Japan and the United States based on the vector error correction model. The results of the analysis are as follows: first, the effect of economic fluctuations between Japan and the United States is asymmetric; whereas fluctuations in the United States economy exert a great influence on Japan, the converse is not true. Secondly, it should be noted that there is a great difference between the two nations with regard to fluctuations in money supply; whereas they exhibit strong exogeneity in the United States, they react to exchange rates to a great extent in Japan. This may reflect differences in the policy reaction functions of the two nations' financial policy authorities.