Question

Group 7 Section 2

Group Project 2

1. Let’s try to find out how inflation affect nominal interest rates. To do so:

a. Plot the three-month U.S. Treasury bill rate (FRED code: TB3MS) from 1960 to the present. What long-run pattern do you observe? What may have caused this pattern?

b. Plot the inflation rate based on the percent change from a year ago of the U.S. consumer price index (FRED code: CPIAUCSL) from 1960 to the present.

How does U.S. inflation history reflect your explanation in part (a)?  

(Hint: adjust the observation date range so you can start the series from 1960)

2. Above, you saw the impact of inflation in the U.S. on short-term U.S. Treasury bill rates. Now examine similar data for Brazil.

a. Plot the Brazilian Treasury bill rate (FRED code: INTGSTBRM193N). Notice the range of values and compare them with the range in the U.S. Treasury bill plot from Problem 1 above.  

b. Plot the inflation rate based on the percent change from a year ago of the Brazilian consumer price index (FRED code: BRACPIALLMINMEI). Comment on the inflation rate in Brazil.  

c. Then, download the Brazilian CPI data using a quarterly frequency. Put it in a spreadsheet by clicking on the relevant tab on the top left part of the screen (you may need to widen the spreadsheet column to see the data.) The unit should be: Index 2010=100. This is the CPI index, not the inflation rate, that is. What happens to the index in the 1990–1994 period?

[Hint: to get quarterly instead of monthly frequencies go in the “Edit Graph” tab and select the appropriate frequency. See below. Once you do that, then download the data to a spreadsheet using the “Download” tab]

Answer 1

1.

a)

The fischer effect states that real interest rate equals the nominal interest rate minus the expected inflation rate.Hence real interest rates fall with increase in inflation. We see a decreasing trend in rates of the 3-month treasury bill.

b)

We see continuous spikes in the inflation rate because of which real interest rates show a decreasing trend.

2.

a)

The range of brazil interest rates is higher than that of the U.S treasury bill.

b)