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Fisher Effect: Exchange Rates for US Dollar and Jananese Yen

Examine the exchange rate of the U.S. dollar to the Japanese yen in January 2005 versus January 2006. Compute the appreciation or depreciation of the U.S. dollar relative to the Japanese yen. Check the U.S. inflation rate for 2005 and apply the Fisher effect formula. Check the average annual inflation rate in Japan for the same time period. Does it support the answer obtained using the Fisher effect? Why or why not?

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See the attached file for complete solution. The text here may not be copied exactly as some of the symbols / tables may not print. Thanks

2005 2006 Change in Exchange Rate 2006 2006 2006 Difference between actual and estimated
JPY/USD JPY/USD US Inflation Actual Japan Inflation Actual Japan Inflation ...

Solution Summary

In this post we test the relationship between US dollar and japanese Yen to see whether the relationship between exchnage rate and inflation hold.