FINC5090 Group Assignment Instruction S2 2022

1. Due Date

Friday 21st October 2022 23:59 (Week 11)

2. Academic Honesty

This is a group assignment where student groups are expected to work independently on the assignment tasks. The similarity of assignment answers will be checked in Turnitin. Any plagiarism, collusion and other dishonest conduct will be penalised subject to the university Academic Integrity Policy. You are highly recommended:

• to keep your workings beyond the access of the students in other groups,

• not to share your document by any means with any students of a different group,

• not to attend any private tutoring sessions on this assignment and

• not to use any assignment help services from a third party.

The FINC5090 teaching team is keen to help. Please do not hesitate to contact the tutors and lecturer for supports.

3. Assignment Tasks

From 2020 to early 2022, the Reserve Bank of Australia (RBA) has taken a wide range of actions to support the Australian economy through the sharp contraction triggered by the pandemic and associated business closures, city lockdowns and work-from-home policies. In common with central banks in many developed economies, a key approach taken by the RBA is known as quantitative easing (QE)1. This assignment provides you with an opportunity to use the theories and models introduced in FINC5090 to analyse the impact of the RBA's QE policy, as well as the other unconventional monetary policies, on money supply, inflation, interest rates and exchange rates during the crisis period, and their ongoing impact on the Australian economy in the aftermath of the pandemic crisis.

Task 1 QE in general (15 marks)

a. Search in RBA publications (www.rba.gov.au) for references regarding the QE. Describe the characteristics of QE as explained in the references. Your description should answer the following questions including: What is QE? How is it implemented in general and what are the key market indicators targeted at by the QE of the RBA? Do not use direct quotations.

b. Search on RBA website for information on the bond purchase program. When did RBA start to implement this unconventional policy and when was the program completed? How large is the total size of the program during its implementation? Describe two other monetary policies used by the RBA during the same period.

c. Explain the direct influences of QE on the balance sheet of the RBA and the balance sheets of commercial banks. You are not expected to present any empirical evidence in this section. It suffices to show theoretical reasonings only. Please focus on identifying the direct influences only and ignore the possible subsequent influences such as deposit creation.

Task 2 QE, money supply and inflation (25 marks

Visit https://www.rba.gov.au/statistics/tables/. In Money and Credit Statistics, download the spreadsheet named “Monetary Aggregates – D3”. Use the data in Column K, L, M and N (seasonally adjusted M1, M3, broad money and money base) only. This table will be referred to as Table 1 in the following task descriptions. On the same webpage, download the data table named “Consumer Price Inflation – G1” under Inflation and Inflation Expectations. Use the data in Colum B (consumer price index) only. This table will be referred to as Table 2 in the following task descriptions. For both tables, use the data reported between December 2018 and June 2022. Answer the questions below.

a. Which of the measures in Columns K, L, M and N of Table 1 is supposed to be directly influenced by the QE? You should provide a theoretical justification first. Then use the data in

Table 1 to validate your justification. You need to carefully decide how to display/visualise the changes of the measure(s). (5 marks)

b. Use the data in both Table 1 and Table 2, compare the changes in money base, broad money and CPI. Make necessary adjustments to align the frequency of data. Then display the changes in the three variables on one graph. You need to carefully decide how to measure and display/visualise the changes of the variables to support the subsequent analysis in part (c), (d) and (e). (5 marks)

c. Based on the graph obtained in part (b) and the available data, discuss whether the observed changes in broad money and the monetary base are consistent with your understanding of the relationship between these two variables. (5 marks)

d. Follow the monetary approach introduced in Topic 5, discuss the general relationship between money supply and price level. Discuss to what extent the graph obtained in part (b) supports this prediction. Has QE had a significant impact on the money supply during its implementation? Explain why the observed relationship is/isn’t consistent with the prediction of the theory. (10 marks)

Task 3 QE and the yield curve (20 marks)

a. Explain the expected influences of QE on the yield curve. You are not expected to provide any empirical evidence when answering this question. (5 marks)

Visit https://www.rba.gov.au/statistics/tables/ and download “Zero-coupon Interest Rates – Analytical Series – 2009 to Current – F17” under Interest Rates.

b. Plot three yield curves, one for the date immediately before the first round of QE, one for the date right on the announcement date of the first round of QE and one for the date right after the completion of the last round of QE. Label the graph clearly. (5 marks)

c. Explain whether the changes of the yield curve around the announcement of the first round of QE are consistent with your expectations developed in Part (a). Why does the yield curve on the completion of the QE exhibit a different shape? Provide a brief justification and comment on whether the QE has significantly influenced the market interest rates during its implementation. (10 marks)

Task 4 QE, inflation, interest rate and exchange rate (25 marks)

Download the data table named “Task4_variable.exls” from Canvas and fill in the blank column “AUS_inflation” with the quarter-on-quarter inflation rates of Australia that you obtained from Task 2 part (b). This table will be referred to as Table 3 in the following task descriptions.

a. Following the interest parity, estimate the exchange rate (expressed as USD per AUD) for each date in Table 3 (ignore the first date which serves as the initial point of time). Introduce how each variable in the interest parity is measured. In your report, please display the following results in a table including dates, the actual exchange rates, the forecasted exchange rates, the differences between the actual and the forecasted values. How large is the forecast error on average? (5 marks)

b. Following the relative purchasing power parity (RPPP), estimate the RPPP exchange rate (expressed as USD per AUD) for each date in Table 3 (ignore the first date which serves as the initial point of time). Introduce how each variable in the RPPP is measured. In your report, please display the following results in a table including dates, the actual exchange rate, the RPPP exchange rates, the differences between the actual and the RPPP exchange rates. How large is the difference on average? (5 marks)

c. Discuss which method, the interest rate parity or the RPPP, is more appropriate for estimating the influence of the QE on the quarterly changes in exchange rate. Your discussion should refer back to your findings in Task 2 and Task 3. Your discussion should also refer to the theoretical and empirical characteristics of the models. (10 marks)

d. Briefly summarise your findings in Tasks 1 to 4 and provide some conclusive remarks on the effectiveness of the QE in helping stabilise Australian economy during the crisis period. (5 marks)

Overall quality and referencing (15 marks)

Maximum length of assignment: We expect a reasonably presented assignment to have around 1800 to 2000 words excluding the title page, table of content, reference list and appendix. 10 marks will be deducted for every 100 words exceeding the word limit. For example, you will lose 10 marks if your report has 1699 words or 2101 words.

Formatting requirements: 1.5 line spacing 2 cm margins, 12pt font size, Times New Roman and Arial are both acceptable.

Tables and figures should be clearly labelled. Penalties apply for poorly presented work. You must display the required tables and graphs in the body of the report. You will NOT receive any marks if you put tables and graphs in appendix just in order to satisfy the word limit.

You are not required to present the answers in a report format. You must label your answers to each part of the tasks clearly. (e.g. Task 1, Task 2, a. b., etc.).

You attach your complete Excel calculations to the report as appendix. You can also add other less important results in Appendix.

Referencing: You are expected to use academic references to support your analysis and arguments. Citations and the reference list must be prepared using APA 7th or Harvard referencing styles (https://libguides.library.usyd.edu.au/citation).

Writing: The logic of the answers must be easy to follow. There are expected to be no spelling or grammatical errors and terminology should be clearly defined.

4. Marking Criteria

The criteria below will be followed when marking each part of the assignment (including in assessing the overall quality of the report):

i. The extent and quality of critical reasoning/critical thinking

ii. The demonstration of knowledge of relevant theory.

iii. The successful usage and interpretation of relevant data

iv. The extent to which the work is clearly and concisely presented.

Weight of Final Mark: This assignment will be marked out of 100 marks and will be scaled to account for 30% of course total mark.

5. Groupwork ethics

i. Every group member is expected to be actively engaged in the whole process of group assignment. Though it is hard to divide the work completely equally, “free-riding” practice will not be tolerated.

ii. From week 7 to week 11, you are expected to meet at least four times to discuss the assignment tasks and to update your group members on your progress. At your first group meeting, please decide who will be the group leader. The group leader will be responsible for coordinating the work of the group and submitting the group report by the deadline.

iii. Each group member will complete the Peer Performance Assessment Form (to be released on Canvas as a separate assignment approaching the due date) and submit the form separately online. Due to the limited marking time, we must give all group members the same mark based on group performance. However, free-riders will be penalised and the information you provide on the Peer Assessment Form will be used to determine whether a group member has made a reasonable contribution to the group's work.

6. Submission

i. The only acceptable form of submission is electronic via the submission link in the unit’s Canvas site. Hardcopy and email submissions will NOT be accepted. Late submissions will be penalized according to assessment policy. All submission will be checked through TURNITIN for similarity with external sources.