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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

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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. () 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? Figure 1: Emerging Markets Figure 2: Advanced Economies 4 ] = = S~ 2

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