Money and Banking

Project 2: Money and Banking
Summer 2019

1. On the website of FRED data base (https://fred.stlouisfed.org/categories), find the data for the
   interbank rates for Australia (IR3TIB01AUM156N) and Interest rates on Certificates of Deposit for
   Japan (IR3TCD01JPM156N) from January 1990 to the latest month available (monthly frequency).
   a. Plot these two interest rates on a line graph. Explain your observation and make an implication
   for the movement of the exchange rate between Australian dollar and Japanese yen.
   b. Find the data on the exchange rate of Japanese yens per U.S. dollar (EXJPUS) and U.S. dollars per
   Australian dollar (EXUSAL) from the same period; then, calculate and graph the cross exchange
   rate of Japanese yens per Australian dollar. Is it fully or partly consistent with your answer to
   part a? Why and why not?
   c. Look for the economic news on both Japanese and Australian economies and any anticipated
   changes in the interest rates by their central banks. Do you think the Australian dollar will
   appreciate or depreciate against the yen next month? Explain why.
2. On the website of FRED data base, download the following series on a quarterly frequency from
   January 2017 until the latest quarter available.
    Personal consumption expenditure price index (PCECTPI): Adjust the units setting to
   “Percentage Change From Year Ago” to obtain the inflation rate.
    Real GDP (GDPC1)
    Real potential GDP (GDPPOT)
    Unemployment rate (UNRATE)
   a. Fill the following table for the most recent four quarters of data available. Assume that 2% is the
   targeted inflation rate.
   Quarter PCE
   Inflation
   Real GDP Real Potential GDP Inflation Gap GDP Gap
   2019:Q1
   2018:Q4
   2018:Q3
   2018:Q2
   Average
   Note:
   Inflation Gap = PCE inflation – 2%
   GDP Gap = (Real GDP – Real Potential GDP) *100/Real Potential GDP
   b. Fill the same table but for the previous four quarters of data available. Assume the same
   targeted inflation rate of 2%.
   Quarter PCE Inflation Real GDP Real Potential GDP Inflation Gap GDP Gap
   2018:Q1
   2017:Q4
   2017:Q3
   2017:Q2
   Average
   c. Using the unemployment data, calculate the average unemployment gap for the same two
   periods above using the natural rate of unemployment at 4.8%. Based on your answers to parts
   a through c, does the divine coincidence apply to the current economic situation (most recent 4
   quarters) and the past year (the previous 4 quarters)? Why or why not?
   d. What do you think the sources of shocks to the economy in the two periods? Explain the
   reasoning.

Sample Solution