Be sure to provide support for your answers. You can use all the assigned references as well as class discussions. You will not receive points for unexplained answers.
1. Consider a small opened economy where the trade sector plays an important role for the economic growth of the country. Assume the central bank authority is facing a dilemma to decide between a fixed and a flexible exchange rate regime given that it wishes to keep monetary policy. Explain and show (using IS-LM-BOP graphs) under which case of exchange rate regime and capital controls combination this country will be better off. Fully justify your choice of regime. Would Calvo and Mishkin (2003) and Fisher (2001) agree with your recommendation? Explain.
2. In the next year, Lithuania aims to adopt the euro. Seven other countries are lined to follow that path in the coming years: Romania, Bulgaria, Poland, Czech Republic, Hungary, Sweden and Croatia. Given the conditions to join a currency union, which countries seem to fulfill that criteria and which not? Would Lane (2006), Sapir (2011) and Blanchard (2004) support the idea of those countries to be part of the euro zone? Be sure to support your answer.
3. Go to the website of the Central Bank of Brazil and the Federal Reserve Bank of St. Louis and download monthly data from Jan.1990-Dec.2013 for all the following variables: From the Central Bank of Brazil (within Economic and Finance: Time Series):
Industrial Production Indicator -general
National Consumer Price Index
Commercial Exchange Rate (with U.S. dollar)
Average interest rate - New operations - Total
Exports
Dummy for exchange rate regime From the Federal Reserve Bank of St. Louis:
Industrial Production Index
Effective Federal Funds Rate (Fedfunds)
Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL) Run a regression with Brazil's industrial production index as the dependent variable and all other variables plus volatility of industrial production and that of exchange rates (if needed after performing the necessary tests) as independent variables. With your results answer the following:
a. Do you find evidence of international transmission? What seems to be the main channel?
b. Do you find support for the argument discussed in class about the impact of U.S. monetary shocks? Explain.
c. Does volatility seem to impact growth?
4. Assume you work in a ratings firm. You are tasked with performing a country risk analysis for an important multinational enterprise. The MNE is located in Europe and is interested in vertical FDI starting 2015. The MNE is looking to have a country risk analysis of three upper-middle income countries. The choice of countries is left to you, but an important consideration is that this MNE is in the car industry. In detail, justify your choice of countries, explain the criteria and weights assigned for political and financial factors. Explain what factors are involved and show your calculations for the overall risk rating of each country. What country do you recommend and why?
5. For the country you have been following this semester, analyze the impact of financial development in its economy. Obtain quarterly (preferably, if not annual) information with at least 35 data points for the following variables:
GDP growth
1 measure of the size of the banking sector
1 measure of access to the banking sector
1 measure of efficiency
1 measure of stability
1 measure of unofficial dollarization
Trade openness of the economy
Dummy for exchange rate regime Run a regression where GDP growth is your dependent variable and all other variables are independent variables. With your results answer the following:
a. Do you find evidence of relevance of the banking sector for improving economic performance in the country?
b. Is the population in general having access to formal banking?
c. Is the banking sector efficient?
d. Is the banking sector stable? Does that help to promote growth?
e. Is this economy dollarized? How does that affect economic activity?
f. Does the choice of exchange rate regime matter for your results?