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ECM158 International Macroeconomics

Coursework 2018

1.     Write a review essay on the Twin Deficits, that focuses on whether a government deficit causes a current account deficit.                                                                      (50 marks)

2.     Consider the IS/LM/BP scenario, and suppose that the government imposes a proportional tax rate t.

(a)   Show that the effect on the IS curve is to leave the intercept on the r-axis unchanged, but that the slope changes.                                                                          (4 marks)

(b)   Why is there no effect on the LM curve?                                                         (2 marks)

(c)    For a closed economy, explain the shift to the new equilibrium.                       (4 marks)

(d)   For an open economy, what is the effect on imports? In a fixed exchange rate system, for the current account to return to 0, what must be the net effect on output? (4 marks)

(e)   Explain the shift to the new equilibrium under fixed exchange rates for (i) no capital mobility; (ii) perfect capital mobility.                                                   (8 marks)

(f)    Explain the shift to the new equilibrium under floating exchange rates for (i) no capital mobility; (ii) perfect capital mobility.                                               (8 marks)

3.     This question examines whether 1-month forward rates are decent predictors of next month’s spot rate. Go the Bank of England website

https://www.bankofengland.co.uk/boeapps/database/index.asp?SectionRequired=I&first=yes&HideNums=-1&ExtraInfo=true&Travel=NIxIRx&levels=3

Download $/£ end of month rates for the spot exchange and one-month forward rates, for the period January 2000 till January 2018. Take logs of both series to create s_t and f_t.

(a)   Use any method you choose (e.g. unit root tests, autocorrelation function plots) to infer that these two series have random walk components.                              (6 marks)

(b)   Do the same to infer that that s_t+1 – s_t and f_t – s_t do not have random walk components.                                                                                                               (6 marks)

(c)    Regress s_t+1 – s_t on f_t – s_t. Comment on your results.                                      (3 marks)

(d)   Examine s_t+1 – f_t for random walk components. What do you conclude from all this?                                                                                                                    (5 marks)