could you please solve the question

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Econometrics time series question

could you please solve the question

could you please solve the question
Macroeconomic theory postulates two alternative versions of the purchasing power parity (PPP) hypothesis: In order for the “Absolute PPP” hypothesis to hold, the real exchange rate rer t = e t – (pt – pt*) must be stationary. The “Relative PPP” holds if Δet = β 0 + β 1(Δpt – Δpt*) is a cointegrating relationship. Note that, for notational convenience, real exchange rate can also be defined as rer t = e t – pdif t, where pdif t = (p t – pt*). rer = (log.) real exchange rate, e = (log) nominal exchange rate, p = (log.) domestic price level, p* = (log.) foreign price level, pdif = price differential. Based on 100 observations, it is found that the integration order of e t, p t, p t* and pdif t is one. For rer t, the estimated Augmented Dickey -Fulle r (ADF) statistic is equal to –5.15. The following equations are also estimated: (1) Δet = 0.70 + 1.10( Δpt – Δpt*) SSR = 500, R2 = 0.6 5, ADF(u1) = -5.3 0 (8.88) (7.20 ) (2) et = 0.98pdif t SSR = 2000, R2 = 0. 85 , ADF(u2) = -4.50 (9.91) (3-CO ) e*t = 0.92 pdif *t SSR = 4000, R2 = 0.95 , ADF(u3) = -2.80 (6.69 ) (4) et = 0.35 pdif t + 0.20 pdif t-1 + 0.9 0e t-1 R2 = 0.98 , ADF(u4) = -19.9 (3.56) (4.47) (5.00) (5) Δet = 0.65 + 0.57 Δpdif t – 0.44 ecm t-1 R2 = 0. 74 (7.77) (6.66) ( -5.55) (6) Δet = 0.64 + 0.55 Δpdif t – 0.48 rer t-1 R2 = 0.7 3 (7.67) (6.77) ( -5.44) (7) Δpt = 0. 12 + 0.60 Δpdif t + 0.25u2 t-1 R2 = 0.99 (2.67) ( 3.19) (4.44) Where ADF(u1), ADF(u2), ADF(u3) and ADF(u4) are the ADF statistics for the residuals of the corresponding equations. PART A 1. Using the results, decide in favour or against the absolute or relative PPP hypotheses. 2. The series p t and p t* are cointegrated with a unitary coefficient. Comment. 3. Explain why the researcher estimated Model 3. State and test the maintained hypothesi s for the estimation of Model 3. 4. What is the equilibrium (error) corre ction mechanism (ecm) term in (5 )? Interpret and compare equations (5) and (6 ). 5. Interpret equation (7). 6. Compare all the estimated e quations. Choose the best model. PART B. Consider the following VAR process: [ Δe Δpd if ] = [ −0.40 (−4.0) −0.01 (−0.1) ] + [ 0.70 (4.10 ) 0.20 (3.60 ) 0.04 (0.40 ) 1.90 (4.50 ) ][ Δe Δpdif ]t-1 Interpret the VAR results in the context of error correction mechanism(s) and/or Granger non – causality of the variables. Compare the results with those presented in PART A.

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