Problem sets 1

[Stavro]

Lasst uns doch die Aufgaben gemeinsam lösen: Hier mal die Aufgabenstellung

1. In this problem you are asked to analyse whether the Feldstein-Horioka puzzle holds for Austria and
whether the relationship between investment and savings changed since the 1970s.
(a) Explain the relationship between savings and investment in an open economy. Should this interre-
lation get stronger or weaker with the degree of international nancial integration of a country?
(b) Go to http://data.worldbank.org/ and download the time series for the investment and savings
rate in Austria from 1970 to 2010. For investment use Gross xed capital formation (% of GDP)
and for savings use Gross domestic savings (% of GDP).
(c) Provide a scatter plot that has the savings rate on the vertical and the investment rate on the
horizontal axis. Where would you expect the data points to lie for (i) a country that is strongly
nancially integrated, (ii) a country with little nancial integration? Calculate the correlation
coecient.
(d) Next plot the two time series over time. What do you observe? How strongly are savings and
investments related? Did this change over time?
2. Purchasing Power Parity
(a) What does the absolute PPP state?
(b) What does the relative PPP state?
(c) Why might the relative form of PPP hold even though the absolute form does not hold?
3. Based on what you have learned in the lecture, summarize the empirical evidence on the validity of the
theory of purchasing power parity. (Use 300-450 words for your answer.)
4. In the past, interest rates in Switzerland frequently were lower than interest rates in Germany. As a
result, some companies have specialised in arranging Swiss mortgage loans for German home buyers.
Assume the nominal interest rate for a loan in Germany is 8%, while the nominal interest rate for a loan
in Switzerland is 5%.
(a) Your nancial advisor suggests the Swiss loan, arguing that by doing so you could save e6,000 a
year on your loan of e200,000. Should you trust him blindly?
(b) Assume, real interest rates in Switzerland and in Germany are equal. What can you say about
expected in
ation in the two countries?
(c) Assume, interest rate parity holds. What does the dierence in interest rates tell you about expected
exchange rate developments?
(d) Is there any contradiction in your answers to (b) and (c)? Are the two answers consistent?
(e) Which other factors should be taken into account when making your borrowing decision?

[Raffaele]

Ich werd mich die Tage mal damit auseinandersetzen und paar Lösungen posten. Wäre nice, wenn beide Kurse hier was beitragen würden.

[Stavro]

so hier mal paar lösungen unserer gruppe. hat wer schon weitere aufgaben lösen können?

1a)
FH reasoned that in an open economy savings and investments should be unrelated since savings could seek out the highest global returns.
the higher the degree of integration, the stronger is the interrelation of investments and savings



1b) auf die angegebene website gehen,dann rechts auf den link "time series indicators in databank" klicken, land, zeit und angegebene series (gross fixed capital formation; gross domestic savings % of GDP) auswählen und downloaden



2a) IN an arbitrage free market, the real exchange rate is euqal to unity. This condition is called absolute ppp. Absolute ppp refers to price levels and the level of exchange rate.

2b) Relativ ppp describes differences in the rates of inflation between two countries. specifically, suppose the rate of inflation in canada is higher than that in the US, causing the price of a basket of goods in canada to rise. purchasing power parity requires the basket be the same price in each country, so this implies that the canadian dollar must depreciate vis-a-vis the u.s. dollar. the perecentage change in the value of the currency should then equal the difference in the inflation rates between the two countries

4a) bin mir hier nicht sicher ob des so einfach geht aber nach dem ersten jahr hätte man doch beim deutschen darlehen: 200.000x1.08=216.000 (zinsen von 16.000) und beim schweizer darlehen nur 200.000x1.05=210.000 (zinsen von 10.000), sprich eine ersparnis von 6.000!?!?! könnte man nich also dem finanzberater blind trauen?

[IMC]

Zu Aufgabe 4: Auf welche Folien der Vorlesung bezieht sich dieses Bsp. denn? Aufgaben 1-3 waren im Foliensatz 1 zu finden. Bei 4 bin ich mir allerdings nicht sicher. Also meiner Meinung nach sollte man dem Berater nicht trauen. Um aussagekräftige Folgerungen ziehen zu können braucht man doch sicher die real interest rates und nicht die nominalen. Oder?

[Stavro]

eben, die "real interest rates wären notwendig um aussagekräftige folgerungen ziehen zu können. Also auch mMn "nicht blind vertrauen"!

[kaili]

Ich hab ne frage. . . da steht ja wir sollen ein scatter plot mit allen daten machen. . . ähm händisch oder excel? bin nämlich absolute niete in tabellen machen. . . kann mir da irgendwer helfen?

[Stavro]

glaub schon mit excel....der frühere kurs ist doch am mittwoch nicht ausgefallen, kann wer vieleicht kurz die musterlösungen posten?