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This paper examines the impact of real interest rate on the real exchange rate in Japan using Two Stage Least Square econometric techniques. The two instruments used are money supply and gross domestic product growth rates. The result provides support for the theoretical and empirical evidences of positive relationship between real interest rate and real exchange rate in Japan. The estimation also shows that there is positive relation between trade and Japanese Yen over the period considered in the study. In light of these findings, the study suggests the adoption of fiscal macroeconomic policy instruments that are capable of achieving the inflation-economic growth target rather than monetary policy instrument which has consistently failed over the two decades. As the result indicates, continuous lowering of this monetary policy rate will cause Yen to lose its competiveness by the time all economies (at the least, its competitors) fully adjust and agents are well sensitive to higher returns on their investments.
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Business | Economics | Finance | Finance and Financial Management | International Business
Shodipe, Tomiwa, "THE IMPACT OF REAL INTEREST RATE ON REAL EXCHANGE RATE: EMPIRICAL EVIDENCE FROM JAPAN" (2018). 2018 Awards for Excellence in Student Research and Creative Activity – Documents. 5.