TESTING ALTERNATIVE SPECIFICATIONS OF RESERVE FLOW EQUATIONS: THE JAPANESE EXPERIENCE, 1959–1986

Using annual data for Japan spanning the period 1959-1986, alternative reduced form equations are derived and various monetarist propositions are tested against their Keynesian alternatives. Employing specification and exogeneity tests in order to choose between restricted and unrestricted model specifications - concerning purchasing power parity and exchange market pressure - we find evidence of deviation from purchasing power parity. The results also indicate that the monetary approach is favored over the Keynesian alternative. Finally, the results suggest that foreign disturbances are transmitted to the exchange market pressure variable by foreign money supply growth, controlling for real foreign income growth, rather than through foreign inflation. Reprinted by permission of Taylor and Francis Ltd.