# answer_key_ps_3 - Monetary Macroeconomics University of...

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Unformatted text preview: Monetary Macroeconomics University of Zurich Dr. Pınar Ye¸ sin Winter 2005/2006 Answers to Problem Set 3 1. ( 5 points ) What is the difference between a fixed and flexible exchange rate system? Explain it using the OLG model we discussed in class. Then do some research involving real world data. Obtain US, Swiss, and Japanese price indices annually for years 1950- 2000, and the exchange rate between US Dollar and Swiss Francs and the exchange rate between US Dollar and Japanese Yen for the same time period. Graph those time series and determine when a flexible exchange rate regime was implemented. Can you see similarities in the price indices over time during the fixed exchange rate system? You should include the data in a spreadsheet, your source of data and the graphs to get full credit. [ Hint: You can obtain international data from the International Monetary Fund (IMF)’s International Financial Statistics IFS .] In a fixed exchange rate system countries act together and fix their exchange rate so that it does not fluctuate over time, i.e. e t +1 e t = 1 for all t . In order to do that the countries should choose their money supply growth rates so that their gross inflation rates are equal, that is p a t +1 p a t = p b t +1 p b t z a n a = z b n b So the country pegging its currency to another one would lose its monetary policy inde- pendence to maintain the fixed exchange rate. In a flexible exchange rate regime, the exchange rate between the home country and other countries is free to float over time. The government does not have direct control on its value. We have seen in class that it is not determined when there are no currency controls, that is if people are free to carry any country’s currency they want. In that case our models only give one market-clearing condition for world money supply=world money demand, and we cannot pin down the exchange rate. The exchange rate is undetermined. When there are currency controls, however, the exchange rate is determined by the relative money supply of the two countries and by the relative demand in those two countries: e t = M b t M a t N a t ( y- c a 1 ) N b t ( y- c b 1 ) 1 The rest of this question is finding the corresponding time series and graphing them. Then you will see that the inflation rates in those countries were more or less the same when they were implementing fixed exchange rate regimes, and that there was no apparent relationship between them in recent times during flexible exchange rate regimes. 2. ( 5 points ) Explain briefly the common features of the Austrian, Hungarian, Polish, and German hyperinflations after World War I. How and why did they start, how and why did they end? According to Thomas J. Sargent’s article “ The Ends of Four Big Inflations ”, was there an inherent momentum in the process of these hyperinflations?...
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## This note was uploaded on 03/08/2011 for the course ECONOMIA 44 taught by Professor Jose during the Spring '11 term at Universidad Carlos III de Madrid.

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answer_key_ps_3 - Monetary Macroeconomics University of...

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