Purchasing power parity hypothesis postulates that nominal exchange rate growth (NER) in a country is positively related to domestic inflation rate (Π) and negatively related to foreign inflation rate (Π): NERt = a0 + a1Πt + a2Πt + ut where u is a disturbance term. Under certain conditions, ER can be defined as a function of inflation differential ΠD = Π - Π. Some researchers often prefer to explain real exchange rate change which is defined as RER = ER – Π. Using a sample of 50 annual observations, a researcher estimates the following equations. (1) NERt = 0.19 + 0.96Πt - 0.80Πt R21 = 0.90, SSR1 = 900 (0.01) (0.24) (0.10) (2) NERt = 0.15 + 0.64ΠDt R22 = 0.89, SSR2 = 901 (0.03) (0.10) (3) RERt = 0.05 – 0.95 Πt R23 = 0.60, SSR3 = 905 (4) NERt = b0 + b1ΠD t + b2Πt (0.02) (0.03) (0.24) Compute the estimated standard error of the slope coefficient in Model 3.

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Purchasing power parity hypothesis postulates that nominal exchange rate growth (NER) in a country is positively related to domestic inflation rate (Π) and negatively related to foreign inflation rate (Π*):

NER_t = a₀ + a₁Π_t + a₂Π*_t + u_t

where u is a disturbance term. Under certain conditions, ER can be defined as a function of inflation differential ΠD = Π - Π*. Some researchers often prefer to explain real exchange rate change which is defined as RER = ER – Π. Using a sample of 50 annual observations, a researcher estimates the following equations.

(1) NER_t = 0.19 + 0.96Π_t - 0.80Π*_t R²₁ = 0.90, SSR₁ = 900

(0.01) (0.24) (0.10)

(2) NER_t = 0.15 + 0.64ΠD_t R²₂ = 0.89, SSR₂ = 901

(0.03) (0.10)

(3) RER_t = 0.05 – 0.95 Π*_t R²₃= 0.60, SSR₃ = 905

(4) NER_t = b₀ + b₁ΠD_t + b₂Π*_t

(0.02) (0.03) (0.24)

Compute the estimated standard error of the slope coefficient in Model 3.

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