Audience

For each presentation, each student who is not presenting should prepare at least one question for each paper. Submit your question to the correct forum in the Discussion area at least two days in advance of the presentation, so that the presenters have time to collate the questions and incorporate possible answers.

• Be sure your question does not duplicate other questions already submitted. (You must read the already submitted questions to determine this.)

• Be sure your question demonstrates that you made a serious attempt to understand the paper. Provide enough paper-specific context for your question. Supporting quotes (with page numbers) are typically required for full credit.

• General questions that could be produced by simply reading the paper abstract will not earn credit. Your question should clearly demonstrate that you have read the entire paper.

• Do not simply solicit the presenter’s opinion or beliefs. Ask paper-specific questions that involve serious thinking about the results in the paper. Your question should be about the scientific process that the paper represents.

• Questions about how to resolve ambiguities in the text or tables, or how to produce a mathematical result, or how to reconcile apparently conflicting statements in the paper are all appropriate.

• You may explicitly refer to additional literature by citing it and explicitly discussing it, but do not expect the presenter to come up with unspecified “other studies”.

• Do not ask questions that would require the presenter to do outside research. The presenter should be able to rely on careful reading of the presented paper(s) when trying to answer your question. You are looking for clarifications or technical or interpretational aspects of this paper, not soliticiting opinions or requesting additional research. Since your question should be looking for technical help or interpretive clarification, it is best to indicate how far you got pondering your question and what you remain unclear about.

• Limit questions to 250 words.

Presenters

You will upload your presentation to Blackboard for the presentation assignment. Additionally, please send your slides to the entire class ahead of time. (Use the class email list for this.)

Presentations should comprise 15-20 slides and last about 30 minutes. Do not read your presentation from your slides. Instead, your slides should be carefully developed to visually support what you want to say. (Do at least one practice run before presenting.) You goal is to introduce, summarize and critique.

Introduce:

• Who are the authors? What are their institutions? Is there anything you feel we should know about them? Show us pictures of them while you present their bio.

• What are the research questions in this paper?

Summarize:

• What are the core theoretical propositions (if any)? (You may copy figures from the paper, but don't try to discuss too many figures.)

• Where do any data come from? (Be detailed: If we want to replicate the study, is the data adequately documented?)

• What are the key empirical methods used?

• What are the key results? (You may copy tables from the paper, but do not try to discuss too many tables. When tables are dense, copy only a part per slide so that your slides remain readable.)

• If your chosen paper is long and wide ranging, you will not be able to discuss everything in it. Instead, pick the most important parts of the paper to discuss (and explain what makes them the most important).

Questions:

• What questions did you receive from your classmates? What answers if any can you offer? (Do not answer each question separately; that will take too long. Instead, group related questions, and try address each group of questions.)

• What remaining questions do you have about the paper?

Critique:

• Is the theoretical framework (if any) plausible? What questions do you have about it?

• Is the data quality good?

• Are the data adequately documented? (I.e., could you replicate this paper?) Can you find links to the data to share with the class?

• Are the empirical methods chosen appropriate?

• Is the analysis persuasive? Why or why not?

• Are the results interesting? Why or why not?

• Critiques should be thoughtful and research oriented, not just “cheap shots” that could apply to any paper.

Finally, try to help your classmates with the technical parts, and of course with important critiques. Do not simply summarize what they can easily read for themselves.

Presentation Skills:

• Face your audience and speak clearly.

• Slide sequence should be logical; number of slides should be 15–20.

• Presentation should be well-practiced and therefore well-timed.

• Clearly summarize the research question of the paper.

• Do not rely on reading from the slides or from notes. (Turning occasionally to slides or notes is OK.)

• Don't introduce charts just to skip over them; provide economic interpretation of any presented charts.

• Don't introduce equations just to skip over them; provide economic interpretation of any presented equations.

• Discuss the paper’s support for replicability (e.g., availability of data and code).

• Clearly summarize the key conclusions of the paper.

Online Presentation Skills:

• Test your microphone and camera ahead of time. Both should be on during your presentation.

Introductory Concepts

1. In class we showed that covered interest parity should always hold when capital mobility is high. We usually work with the approximation i - i* = F / S - 1; the exact expression is F/ S = (1+ i)/(1+ i*). Suppose the three-month interest rate on XYZ deposits is 3.1%/year. The three-month interest rate on USD deposits is 1.5%/year. Suppose the present spot exchange rate is USD 0.9 per unit of XYZ. Compute the three-month XYZ-USD forward rate, and explain your computation in detail.

2. Unfortunately forward rate data are bit hard to find free online. But at least for the moment, UBC at the website http://fx.sauder.ubc.ca/CAD/forward.html offers a summary of forward rates at various maturities. Use these data for the following exercises.

   1. Enter the spot and forward exchange rates into a single column of your spreadsheet. For example, on 2014-01-27 I found reported the following exchange rates (spot and forward): [0.9010, 0.9003, 0.8997, 0.8990, 0.8972, 0.8953, 0.8933, 0.8850, 0.8724] for [Spot, 1 month, 2 months, 3 months, 6 months, 9 months, 1 year, 2 years, 5 years]. On 2009-11-24 I found reported the following exchange rates (spot and forward): [0.9472, 0.9472, None, 0.9472, 0.9471, None, None, None, None, None]. So many missing values is unusual for this site but was typical during the global financial crisis. For example, on 2008-11-05 I found reported the following exchange rates (spot and forward): [0.8687, 0.8679, None, 0.8680, 0.8685, None, None, None, None, None]. But on 2006-02-18 I found [0.8679, 0.8686, 0.8693, 0.8701, 0.8722, 0.8760, 0.8872, 0.8955, 0.9016, 0.9060]. Naturally, your numbers will depend on the date you access the webpage.

   2. Use your spot and forward rate numbers to compute the rest of the table you see at this website. That is, add the appropriate formulae (from the website) to your spreadsheet in order to compute the forward premium points on CAD (also called the swap rate) and the implied foreign interest rate differential. Note that you are not supposed to find the formulae in your book or notes: you are to use what you have learned to figure these out by reading this website. (The premium is just a scaled arithmetic difference, and FIRD is defined on the UBC page.) Please explain the formulae that you use.

   3. Produce a graph similar to the UBC graph of forward premium points but with one difference: use your computation of the implied foreign interest rate differential instead of the forward premium points.

   4. Based on your graph and data, how would you describe the market's expectations about how the USD-CAD exchange rate will behave over time? Explain carefully.

3. Your US company is expecting a payment from an EU firm of 1M EUR in 3 months. How can you hedge your exposure to exchange rate risk in the forward market? Consider the following scenario. The EUR-USD spot rate is 1.48. Your bank offers you a EUR-USD 3-month forward rate of 1.50. Your EUR-USD (3 month) expected future spot rate is 1.48. If you contract today what do you pay your bank on the settlement date? Does it matter if your expectations prove correct or incorrect?

   Your US company is expecting a payment from a CN firm of 1M CNY in 3 months, but since CNY are nondeliverable you will receive instead the US value of 1M CNY on that date. The Chinese forward market for CNY is restrictive and unattractive, but there is an active offshore market in nondeliverable forward contracts. How can you hedge your exposure to exchange rate risk in the nondeliverable forward market? Consider the following scenario. The USD-CNY spot rate is 6.82. Your bank offers you a USD-CNY 3-month NDF rate of 6.75. Your USD-CNY (3 month) expected future spot rate is 6.82. If you contract today what if anything do you pay your bank on the settlement date? Does it matter if your expectations prove correct or incorrect? (Be very specific about the details, so that it is clear that you understand the difference between an NDF contract and a forward contract.) You may find the follwing helpful: http://www.bis.org/publ/cgfs22fedny5.pdf

PPP Analytics and Evidence

1. What do we mean by “purchasing power parity”? Under what conditions should purchasing power parity hold? (Give an algebraic analysis, including a discussion of the monotonicity and homogeneity of price indexes.) Which commodities would you expect to satisfy these conditions?

   Empirically, is purchasing power parity a good characterization of the relationship between exchange rates and relative price levels in the short run? In the long run? (Refer to emph{specific studies or data}, including data examined in your homeworks, to support your answers.)

   Relate the statistical notion of a random walk to the concept of expected purchasing power parity.

Other Questions for Review

1. Countries have surprisingly varied policies toward providing free access to macroeconomic data produced with tax payer dollars. For example, detailed Canadian time series data are sold by Statistics Canada, while South Africa makes a substantial amount of data freely available. Suppose I need a time series for the CAD-USD exchange rate, and I do not have funds to buy it from StatCan. How could I use the data at http://www.resbank.co.za/economics/histdownload/histdownload.htm to produce this? Be sure to describe the following:

   • What data will you want to use?

   • How will you get the raw data into your data analysis application (e.g., spreadsheet)? (Do it for one series, and describe what you did.)

   • What would you need to do with the raw data to produce usable time series? (You are not asked to produce an entire series; just discuss this.) What could go wrong as you try to use 2 time series to produce one new one? (Do not worry much about that fact that that you cannot have data for every day; that is true of the existing series. Worry about matching them up correctly.)

   • Be specific about any computation you will do. (Illustrate with an actual compuation, using data from a single date of your choosing.)

   What features of international financial markets enable you to do this?

Penn World Table (Introduction)

Download the Penn World Table <https://www.rug.nl/ggdc/productivity/pwt/>. Consult the User Guide to PWT 10.0<https://www.rug.nl/ggdc/docs/pwt100-user-guide-to-data-files.pdf> for a guide to the available documentation. Also look at this Vox column <http://www.voxeu.org/article/recasting-international-income-differences-next-generation-penn-world-table>.

Compute the following:

• At its average historical growth rate, it will take Guinea-Bissau how many years

to reach the 2019 GDP per capita of its former colonizer Portugal?

• At its average historical growth rate, it will take Senegal how many years for GDP per capita to reach its colonizer France’s 2019 level?

• Suppose the Democratic Republic of the Congo can achieve the spectacular growth rate of 7%/year. How many years will it take to reach the current per capita income levels in the United States?

• Based on recent growth rates, will China or Japan first overtake the 2019 GDP per capita of the US?

Other

1. PPP You need to collect some data. You may use any source: just be sure to document your data precisely. The library has the IMF's International Financial Statistics as hard copy and on disk: the reference desk can help you get data from the CD. If you are interested in a particular country, get data for that country. Otherwise pick a country that starts with the same letter as your last name. For your country collect spot rate and price data. Collect a spot exchange rate (against the dollar) for 1973 and 2000 and calculate the gross depreciation for the period: S(2000)/S(1973). Also collect prices P(1973,b) and P(2000,b), where b is the common base year. Use these to compute the gross inflation over the period: P(2000,b)/P(1973,b). Also collect prices P(1973,b) and P(2000,b), where b is the common base year. If your gross inflation calculation differs from your gross depreciation calculation by an order of magnitude or more, you have probably made a mistake in your data collection.

   Note: If you have only P(1973,b1) and P(2000,b2) where b1 and b2 are two different base years, you will have to get another piece of data, P(b2,b1), so you can calculate P(2000,b1)=P(2000,b2) x P(b2,b1). Don't forget your price indices will be expressed as percents: e.g., a reported value of 270 means P=2.7.

   Taking your country as the domestic country, compute PPP(2000)/PPP(1973), where PPP(t) is the relative price level at time t: PPP(t)=P(t)/P*(t) Here is the information for the US P(1973,1982)=0.45, P(2000,1982)=1.72. You are interested in PPP(t) changed over time compared to how the exchange rate changed. Turn in a brief write-up . Include a precise statement of where you got your data. (Precise enough to ensure replicability.)

Exercise from Mark

1. Replication of Mark Figure 3.3

   Replicate (approximately) Figure 3.3 in Mark. (Assume the innovation to the bubble is standard normal.) You will need to use what you learned in the last homework. You may need to ask some questions on the list as well ... Conduct unit root tests on your fundamentals solution and your bubbles solution. What do you learn?

   Estimated time for completion: 2 hours.

2. Do the Chapter 3 end-of-chapter problems in Mark. Use the method of undetermined coefficients for problem 1. Also, use the ./data/mmdat.zip data to reproduce his figure 3.4. (Pay very careful attention to the notes in the preceding table.) What point is Mark making with this figure?

   Estimated time for completion: 6 hours.

Mankiw, Romer, and Weil (1992)

Using the data in their appendix, estimate MRW’s equation (7).

Let us extend the Mankiw, Romer and Weil (1992) article. Recall that they implement an empirical test of the neo-classical growth model. For this empirical exercise, first assemble an updated version of MRW’s dataset. Second, attempt to replicate the crosscountry regressions in MRW using your new dataset.

Extension