Author: Yoshiyasu Ono, Osaka University

In both the journalistic and academic literature on the exchange rate it is commonly believed that the value of a country’s currency reflects its economic power.　As far as the yen/US dollar exchange rate is concerned, however, this seems not to be the case. The rate was 140~160 yen per dollar during the bubble period of the late 1980s but 80~110 yen/dollar during the stagnation period of the 1990s as well as during the past decade.

Open economy macro-dynamic theory tells us that a currency’s value adjusts so that the current account changes in a way that reflects differences between countries in their rates of time preference. Read more…