THE NOMINAL EFFECTIVE EXCHANGE RATES (NEER) &

THE REAL EFFECTIVE EXCHANGE RATES (REER)

GROUP ASSIGNMENT

PROF HARVEY PONIACHEK, SPRING 2016

DUE 2/22/16, SUBMIT HARD COPY, PLSE NO LATE WORK

DERIVE THE NEER AND THE REER BY APPLYING THE FOLOWING MODELS. THIS ASSIGNMENT SHOULD BE PERFORMED BY TEAMS OF UP TO 4 STUDENTS (BUT DEFINITELY NOT MORE), HOWEVER INDIVIDUAL WORK IS ACCEPTABLE. 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 INTERPRETE EMPIRICAL FINDINGS. THE ASSIGNMENT SHOULD BE SUBMITTED FOR GRADING ON THE DUE DATE. A COUPLE OF ASSIGNMENTS WOULD BE SELECTED FOR PRESENTED IN CLASS.

THE NOMINAL EFFECTIVE EXCHANGE RATE (NEER) INDEX

DERIVE THE NEER BY APPLYING THE FOLOWING MODELS, FROM 1997 TO 2007, 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 variable are defined as follows:

• t goes from 2005 to 2015, with the base year being 2005,
• 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 to N, and each derivation for the N countries is done for each year, from 2005 TO 2015

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).

QUOTES ARE INDIRECT, FC/ $, AND FOR END OF YEAR RATES.

Wn MEASURES THE % SHARE OF U.S. EXPORT TO COUNTRY n, and

THE $ INDEX IS SET AT 100 IN 2005, WHICH IS THE BASE YEAR. THE INDEX MEASURES THE VALUE OF THE $ FROM A FOREIGN PERSPECTIVE (FOREIGN TERMS).

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 CHANGES,

FOR DIRECT QUOTES, $/FC, IF NEER >100 IT IMPLIES THE $ DEPRECIATED; AND IF NEER

COUNTRIES TO INCORPORATE IN THE ANALYSIS INCLUDE: CANADA, MEXICO, BRAZIL, JAPAN, GERMANY, FRANCE, UK, CHINA, TAIWAN, S. KOREA, SINGAPORE, INDIA. S. AFRICA AND RUSSIA.

DATA SOURCES: FC/$ EXCHANGE RATES COULD BE OBTAIONED FROM SEVERAL SOURCES, INCLUDING THE FOLLWING: 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 ON THE WEB)

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

REAL EFFECTIVE EXCHANGE RATE (REER) INDEX[1]

REER FC/$ t+1= [(P us, t+1/ P us, t) x (FC/$ n, t+1/ FC/$ n, t) / (P n, t+1/ P n, t ]W n, t

Where the variables are defined as follows:

• t = 2005 to 2015,
• Pus and P fc are the consumer prices indexes (CPIs) for each country in year t+1 or t;
• FC/ $ is the indirect quote of currency n per the $ in year t or year t+1, where t goes from 2005 to 2015, with the base year being 2005,
• n is the number of foreign countries,
• Wn is the export share of the U.S. to each country, and
• the sigma applies to each from 2005 through 2015, and the REER is calculated for the sample of countries for each year, from 2005 to 2015

THE WEIGHTED RATIOS ARE CREATED FOR EACH COUNTRY AND SUMMED UP TO CONSTITUTE THE INDEX FOR THE SPECIFIC YEAR. THE NEER INDEX MEASURES THE EVOLUTION OF the $ AGAINST A BASKET OF THE US MAIN TRADING PARTNERS. THE MODEL SHOULD BE DERIVED FOR 2005 THROUGH 2015, AND YIELD AN INDEX FOR EACH YEAR. THE INDEX SHOULD BE CALCULATED ON A 1.00 BASIS OR ON A 100% BASIS, WHICH IS MORE COMMONLY DONE.

FOR INDIRECT QUOTES, FC/$, IF THE IT IMPLIES THAT ON A WEIGHTED BASIS THE DOLLAR HAS NOT CHANGES; IF THE INDEX> 100 IT IMPLIES THAT THE $ APPRECIATED ON A REAL EFFECTIVE BASIS; AND IF REER

COUNTRIES TO INCORPORATE IN THE ANALYSIS INCLUDE: THE SAME COUNTRIES LISTED UNDER THE NEER ABOVE.

U.S. EXPORT DATA BY GEOGRAPHIC MARKETS COULD BE OBTAINED FROM THE BEA, SURVEY OF CURRENT BUSINESS (VARIOUS ISSUES), OR THE US STATISTICAL ABSTRACT, OR FROM THE PRESIDENTS ECONOMIC REPORT (ALL OF WHICH ARE AVAILABLE FROM THE WEB)

PRICE DATA COULD BE OBTAINED FROM THE IMF (CITED ABOVE), AND SHOULD INCLUDE THE CONSUMER PRICE INDEX (LINE 64 IN EACH COUNTRY DATA PAGE); BUT OTHER PRICE INDEXES COULD BE USED INSTEAD, INCLUDING THE WHOLESALE PRICE INDEX, ETC.

DATA SOURCES: FC/$ EXCHANGE RATES COULD BE OBTAIONED FROM THE IMF, INTERNATIONAL FINANCIAL STATISTICS (ANNUAL OR MONTHLY REPORTS), OR FROM ANY OTHER SOURCE, SUCH AS THE FEDERAL RESERVE BULLETIN, US STATISTICAL ABSTRACT, ETC. (CURRENCY RATES COULD BE RETRIEVED FROM THE WEB, EXCEPT FOR THE IMF DATA)

[1] SOURCES:

SEE OUR TEXTBOOK

FEDERAL RESERVE BULLETIN, NEW SUMMARY MEASURES OF THE FOREIGN EXCGANGE VALUE OF THE DOLLAR, OCTOBER 1998, Pp. 811-818

LUCI ELLIS, MEASURING THE REAL EXCHANGE RATE: PITTFALLS AND PRACTICALITIES, RESERVE BANK OF AUSTRALIA, AUGUST 2001

\f