WORKING WITH MACROECONOMIC DATA
For data to use in these exercises, go to the Federal Reserve Bank of St. Louis FRED database at fred.stlouisfed.org.
1. The Bretton Woods fixed-exchange-rate system was terminated in 1972, and the main currencies of the world now follow a flexible exchange rate system governed by market forces.
a. Graph the eurozone's nominal exchange rate and real effective exchange rates from 1994 to the present. What are your observations when comparing the two curves? Would you say that fluctuations in the real exchange rate arise primarily from fluctuations in the nominal exchange rate or from changes in domestic and foreign price levels?
b. Higher real interest rates ought to strengthen the domestic currency (all else being equal) by making the domestic currency's assets more attractive. Graph the interest rate of government securities for the eurozone and compare it to the first graph on nominal and real effective exchange rates. Do you see the hypothesized
relationship between the real interest rate and the exchange rates?
2. Using quarterly data since 1994, graph Japan's real exchange rate against its net exports as a fraction of GDP. Also create a scatterplot of these two variables and add a trend line for each. Is the theoretically predicted relationship of the real exchange rate and net exports visible in the figures?
3. Plot the exchange rate of the Hong Kong dollar relative to the U.S. dollar from January 1981 to the present. Was the Hong Kong dollar generally appreciating or depreciating relative to the U.S. dollar between 1981 and late 1983? What happened after 1983? Research and find an explanation for the value of the exchange rate after 1983.
4. Plot data on the exchange rate between the dollar and the euro, along with the FRED series for the trade- weighted broad exchange rate for the United States. How do the patterns of the two exchange rates differ? (Hint: Consider plotting the inverse of the exchange rate between the dollar and euro to see the relationship.)