Expected Rate of Depreciation The figures below show the expected and actual (ex-post) rate of depreciation of cur- rencies against the USD at 12 month horizon and the interest rate differential at the same horizon for 34 currencies -22 emerging markets and 12 advanced economies over the period 1996m11:2018m12. The blue dots are individual observations and the red lines result from regressions. The black lines display the 45 degree lines. "Home" represents an emerging market/advanced economy and “Foreign” represents the U.S. Use these figures to answer the following questions: (a) Focusing on Figures 1 and 2, what would these graphs imply about the Weak Uncov- ered Interest Rate Parity (UIP) condition in advanced economies (AE) and emerging markets (EM)? Explain clearly your reasoning. (b) Focusing on Figures 3 and 4, what would these graphs imply about the UIP condition? Explain clearly your reasoning for both AE and EM. (c) What would points 2.a. and 2.b imply about excess returns? (d) What would these results imply about the Full Information and Rational Expectations (FIRE) assumption? Actual Rate of Depreciation 1.6 1.2 Figure 1: Emerging Markets Slope: 0.544 080 800 0 GO 8 ° 800 80 ° 080 Interest Differential (Home minus Foreign) Figure 3: Emerging Markets Slope: 0.524 00 -2 2 4 .6 Interest Differential (Home minus Foreign) Expected Rate of Depreciation -1 Z'- Actual Rate of Depreciation 0 で Figure 2: Advanced Economies Slope: -0.189 Interest Differential (Home minus Foreign) Figure 4: Advanced Economies Slope: 0.829 ό Interest Differential (Home minus Foreign)
Expected Rate of Depreciation The figures below show the expected and actual (ex-post) rate of depreciation of cur- rencies against the USD at 12 month horizon and the interest rate differential at the same horizon for 34 currencies -22 emerging markets and 12 advanced economies over the period 1996m11:2018m12. The blue dots are individual observations and the red lines result from regressions. The black lines display the 45 degree lines. "Home" represents an emerging market/advanced economy and “Foreign” represents the U.S. Use these figures to answer the following questions: (a) Focusing on Figures 1 and 2, what would these graphs imply about the Weak Uncov- ered Interest Rate Parity (UIP) condition in advanced economies (AE) and emerging markets (EM)? Explain clearly your reasoning. (b) Focusing on Figures 3 and 4, what would these graphs imply about the UIP condition? Explain clearly your reasoning for both AE and EM. (c) What would points 2.a. and 2.b imply about excess returns? (d) What would these results imply about the Full Information and Rational Expectations (FIRE) assumption? Actual Rate of Depreciation 1.6 1.2 Figure 1: Emerging Markets Slope: 0.544 080 800 0 GO 8 ° 800 80 ° 080 Interest Differential (Home minus Foreign) Figure 3: Emerging Markets Slope: 0.524 00 -2 2 4 .6 Interest Differential (Home minus Foreign) Expected Rate of Depreciation -1 Z'- Actual Rate of Depreciation 0 で Figure 2: Advanced Economies Slope: -0.189 Interest Differential (Home minus Foreign) Figure 4: Advanced Economies Slope: 0.829 ό Interest Differential (Home minus Foreign)
Chapter1: Making Economics Decisions
Section: Chapter Questions
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Please provide all reasoning.
Transcribed Image Text:Expected Rate of Depreciation
The figures below show the expected and actual (ex-post) rate of depreciation of cur-
rencies against the USD at 12 month horizon and the interest rate differential at the same
horizon for 34 currencies -22 emerging markets and 12 advanced economies over the period
1996m11:2018m12. The blue dots are individual observations and the red lines result from
regressions. The black lines display the 45 degree lines. "Home" represents an emerging
market/advanced economy and “Foreign” represents the U.S. Use these figures to answer
the following questions:
(a) Focusing on Figures 1 and 2, what would these graphs imply about the Weak Uncov-
ered Interest Rate Parity (UIP) condition in advanced economies (AE) and emerging
markets (EM)? Explain clearly your reasoning.
(b) Focusing on Figures 3 and 4, what would these graphs imply about the UIP condition?
Explain clearly your reasoning for both AE and EM.
(c) What would points 2.a. and 2.b imply about excess returns?
(d) What would these results imply about the Full Information and Rational Expectations
(FIRE) assumption?
Actual Rate of Depreciation
1.6
1.2
Figure 1: Emerging Markets
Slope: 0.544
080
800 0
GO
8
°
800
80
°
080
Interest Differential (Home minus Foreign)
Figure 3: Emerging Markets
Slope: 0.524
00
-2
2
4
.6
Interest Differential (Home minus Foreign)
Expected Rate of Depreciation
-1
Z'-
Actual Rate of Depreciation
0
で
Figure 2: Advanced Economies
Slope: -0.189
Interest Differential (Home minus Foreign)
Figure 4: Advanced Economies
Slope: 0.829
ό
Interest Differential (Home minus Foreign)
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