n analyst argues that exchange rate movements depend on interest rate differentials (that is, the International Fisher effect), country-specific economic policy uncertainty measures and country-specific GDP growth rates. With this in mind, the analyst estimates the following model: Expected rate of appreciation of yen against the dollar(%)= =0.5[idollar(%) – iyen(%)]+0.5[idollar(%) – iyen(%)]2+0.2[σUS(%) – σJAP(%)]+ +0.2[σUS(%) – σJAP(%)]2+0.1[GDPJAP(%) – GDPUS(%)]. In this model, idollar(%) is the one-year interest rate in the US, iyen(%) is the one-year interest rate in Japan, σUS(%) refers to economic policy uncertainty in the US, σJAP(%) refers to economic policy uncertainty in Japan, GDPUS(%) refers to annual GDP growth in the US and GDPJAP(%) refers to annual GDP growth in Japan. Assume idollar=6%, iyen=4%, σUS=5%, σJAP=1%, GDPUS=2% and GDPJAP=1%. Calculate the expected rate of appreciation of the yen against the dollar
n analyst argues that exchange rate movements depend on interest rate differentials (that is, the International Fisher effect), country-specific economic policy uncertainty measures and country-specific GDP growth rates. With this in mind, the analyst estimates the following model: Expected rate of appreciation of yen against the dollar(%)= =0.5[idollar(%) – iyen(%)]+0.5[idollar(%) – iyen(%)]2+0.2[σUS(%) – σJAP(%)]+ +0.2[σUS(%) – σJAP(%)]2+0.1[GDPJAP(%) – GDPUS(%)]. In this model, idollar(%) is the one-year interest rate in the US, iyen(%) is the one-year interest rate in Japan, σUS(%) refers to economic policy uncertainty in the US, σJAP(%) refers to economic policy uncertainty in Japan, GDPUS(%) refers to annual GDP growth in the US and GDPJAP(%) refers to annual GDP growth in Japan. Assume idollar=6%, iyen=4%, σUS=5%, σJAP=1%, GDPUS=2% and GDPJAP=1%. Calculate the expected rate of appreciation of the yen against the dollar
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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An analyst argues that exchange rate movements depend on interest rate differentials (that is, the International Fisher effect), country-specific economic policy uncertainty measures and country-specific GDP growth rates. With this in mind, the analyst estimates the following model:
Expected rate of appreciation of yen against the dollar(%)=
=0.5[idollar(%) – iyen(%)]+0.5[idollar(%) – iyen(%)]2+0.2[σUS(%) – σJAP(%)]+
+0.2[σUS(%) – σJAP(%)]2+0.1[GDPJAP(%) – GDPUS(%)].
In this model, idollar(%) is the one-year interest rate in the US, iyen(%) is the one-year interest rate in Japan, σUS(%) refers to economic policy uncertainty in the US, σJAP(%) refers to economic policy uncertainty in Japan, GDPUS(%) refers to annual GDP growth in the US and GDPJAP(%) refers to annual GDP growth in Japan. Assume idollar=6%, iyen=4%, σUS=5%, σJAP=1%, GDPUS=2% and GDPJAP=1%. Calculate the expected rate of appreciation of the yen against the dollar
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