THE NOMINAL EFFECTIVE EXCHANGE RATES ("NEER") &

THE REAL EFFECTIVE EXCHANGE RATES ("REER")

GROUP ASSIGNMENT

U.S. CLASS

DERIVE THE NEER AND THE REER BY APPLYING THE FOLLOWING MODELS. THE OBJECTIVE OF THIS ASSIGNMENT IS TO FAMILIARIZE YOU WITH THE APPLICATION OF FINANCIAL MODELS, INTRODUCE YOU TO MARKET DATA SOURCES, AND PROVIDE YOU WITH THE OPPORTUNITY TO INTERPRET EMPIRICAL FINDINGS. THE ASSIGNMENT SHOULD BE SUBMITTED FOR GRADING ON THE DUE DATE. A COUPLE OF ASSIGNMENTS WOULD BE SELECTED FOR PRESENTED IN CLASS.

1. THE NOMINAL EFFECTIVE EXCHANGE RATE (NEER) INDEX

DERIVE THE NEER BY APPLYING THE FOLLOWING MODELS, FROM 2005 TO 2017, BY USING YEAR-END DATA FROM THE SOURCES CITED BELOW:

NEER FC/ $, t+1 =

[FC / $ n, t+1 / FC/ $ n, t] W n, t

where the variables are defined as follows:

• t goes from 2010 to 2022 (the first year of the analysis is 2011 in comparison to 2010),
• FC/ $n,t is the indirect quote of currency n per the $ in year t,
• n is the number of foreign countries (that are listed below),
• Wn is the export share (%) of the U.S. to each country, and
• sigma relates to aggregation for country n=1 to N, and each derivation for the N countries is done for each year, from 2010 TO 2022

THE WEIGHTED RATIOS ARE CREATED FOR EACH COUNTRY AND SUMMED UP FOR ALL THE n COUNTRIES TO CONSTITUTE THE INDEX FOR THE SPECIFIC YEAR. THE NEER INDEX MEASURES THE EVOLUTION OF THE $ FROM THE PERSPECTIVE OF THE U.S. MAIN TRADING PARTNERS (THAT ARE LISTED BELOW).

1. QUOTES ARE INDIRECT, FC/ $, AND FOR END OF YEAR RATES.
2. Wn MEASURES THE % SHARE OF U.S. EXPORT TO COUNTRY n, and Wn=1

1. THE $ INDEX IS SET AT 100 IN 2010, WHICH IS THE BASE YEAR. THE INDEX MEASURES THE VALUE OF THE $ FROM A FOREIGN PERSPECTIVE (FOREIGN TERMS).

1. WHEN THE INDEX IS ABOVE 100, IT IMPLIES THAT THE DOLLAR APPRECIATED; AND WHEN IT IS BELOW 100, IT IMPLIES THAT THE $ DEPRECIATED. WHEN THE INDEX FOR A SPECIFIC YEAR IS 100 IT IMPLIES THAT ON A TRADE-WEIGHTED BASIS THE DOLLAR HAS NOT CHANGED,

1. FOR DIRECT QUOTES, $/FC, IF NEER >100 IT IMPLIES THE $ DEPRECIATED; AND IF NEER < 100, IT IMPLIES THAT THE $ APPRECIATED

1. COUNTRIES TO INCORPORATE IN THE ANALYSIS INCLUDE CANADA, MEXICO, BRAZIL, ARGENTINA, JAPAN, GERMANY, FRANCE, UK, TURKEY, CHINA, S. KOREA, SINGAPORE, INDIA, THAILAND, S. AFRICA, NIGERIA, AND RUSSIA.

1. DATA SOURCES: FC/$ EXCHANGE RATES COULD BE OBTAINED FROM SEVERAL SOURCES, INCLUDING THE IMF, INTERNATIONAL FINANCIAL STATISTICS (ANNUAL OR MONTHLY REPORTS AVAILABLE IN THE LIBRARY OR ON THE WEB), OR FROM ANY OTHER SOURCE, SUCH AS THE FEDERAL RESERVE BULLETIN, US STATISTICAL ABSTRACT, OR WEB BASED SOURCES. (IN PAST ASSIGNMENTS, MANY OF MY STUDENTS DID THEIR RESEARCH ENTIRELY WITH DATA OBTAINED FROM THE WEB)

1. U.S. EXPORT DATA BY GEOGRAPHIC MARKETS COULD BE OBTAINED FROM THE IMF, DIRECTIONS OF TRADE; OR THE BEA, SURVEY OF CURRENT BUSINESS (VARIOUS ISSUES, AVAILABLE IN THE LIBRARY), OR THE U.S. STATISTICAL ABSTRACT, OR FROM THE U.S. PRESIDENT'S ECONOMIC REPORT (ALL OF THE ABOVE SOURCES ARE AVAILABLE ON THE WEB)