Portfolio flows and the US dollar-yen exchange rate

Abstract

This paper investigates the effects of portfolio flows on the US dollar-Japanese yen exchange rate changes over the period 1988:01 to 2011:04. Using a time varying transition probability Markov-switching framework, the results suggest that the impact of portfolio flows on the dollar-yen exchange rate changes is state dependent. In particular, the results show that portfolio inflows from Japan towards the US, more than monetary variables, strengthen the probability of remaining in the dollar-yen appreciation state. Therefore credit controls on the flows can be used as a policy tool to pursue economic and financial stability.