This paper proposes a hybrid monetary model of the dollar–yen exchange rate that takes into account factors affecting
the conventional monetary model's building blocks. In particular, the hybrid monetary model is based on
the incorporation of real stock prices to enhance money demand stability and also, productivity differential, relative
government spending, and real oil price to explain real exchange rate persistence. By using quarterly data
over a period of high international capital mobility and volatility (1980:01–2009:04), the results show that the
proposed hybridmodel provides a coherent long-run relation to explain the dollar–yen exchange rate as opposed
to the conventional monetary model.