Economic theory predicts connections between fluctuations in a country's exchange rate and its real GDP relative to other countries. Past evidence of such connections has been very weak. An examination of periods of large or sustained changes in GDP (rather than small, temporary changes), however, reveals new evidence of these connections. Focusing on Japanese yen exchange rates, such examination shows that the yen tends to depreciate when Japanese real GDP, relative to a comparison country, rises above its trend for several consecutive quarters.
Amanda L. Kramer
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