Description

ECON 352 International Finance

Assignment 1

August 12th, 2020

This assignment is due on Wednesday, August 26th at 11:00 am.

It must be submitted electronically via CANVAS as a single pdf file.

It is worth 15 points or 15% of the final grade.

Please, answer ANY THREE (3) questions out of the four available questions. Each

question is worth 5 points.

Please, use appropriate software to produce your plots and to write your answers.

Make sure that all your sources of information are properly cited. Carefully document

any manupulations with data you made to obtain the plots.

Question 1. (Absolute PPP) Consider Figure 3-3 in the textbook (Slide 14, Topic 3).

(a) Collect the necessary data (e.g. from OECDStat or FRED) to replicate Figure 3-3 for the

U.S. and any high income country. Plot in the same graph the evolution of the nominal

exchange rate and the relative price levels of the two countries. In a separate figure, plot

the evolution of the real exchange rate. Does absolute PPP seem to hold? Why?

(b) Repeat the exercise for the U.S. and a middle income country.

(c) Repeat the exercise for the U.S. and a low income country.

Question 2. (Relative PPP) Consider Figure 3-2 in the textbook (Slide 13, Topic 3).

(a) Collect the necessary data (e.g. from OECDStat or FRED) to replicate Figure 3-2 for the

U.S. and any high income country.

(b) Compute the inflation differential (in %, per year, against the U.S.) and the rate of

depreciation (in %, per year, against the U.S.) for your chosen country/currency over

the period 1975-2015. Plot your observation point and the 45% degree line as in Figure

3-2.

(c) Repeat (a) and (b) for four additional countries/currencies. Do your observations contradict

the predictions of the relative PPP? Why?

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Question 3. (Hyperinflations) Consider any two hyperinflation episodes that took place

after World War II. Make a short PowerPoint presentation (5-6 slides) that describe the

key features of these events, their probable causes and consequences for the economy.

Complement your slides with a brief discussion (1 page). What are the key differences

between the two hypeinflation episodes? What are the key similarities? How did the

episodes end? Which policies seemed to work and which seemed to fail? Use “The

Economist Historical Archive” (link) to collect additional comments on the events.

Question 4. (UIP) Use “The Economist Historical Archive” (link) to collect data on exchange

rates and interest rate from The Economist’s Economic and Financial Indicators

(see an example below).

(a) Select an old issue of The Economist, locate Economic and Financial Indicators, and

choose a few currencies/countries. Use the Uncovered Interest Parity together with the

reported interest rates and the spot exchange rates to make a prediction for exchange

rates in a year’s time.

(b) Use The Economist issue published in one year’s time to check the quality of your forecast.

Compute the percentrage deviation of the realized spot rates from your predictions.

(c) Repeat (a) and (b) for several years. Plot the evolution of your forecast exchange rate,

realized exchange rate, and the forecast errors over time for each currency. Does UIP

seem to be a good predictor of the future exchange rates?