Chapter 1.4, Problem 22E

Banking Two Harvard economists studied countries’ relationships between the independence of banks and inflation rates from 1955 to 1990. The independence of banks was rated on a scale of –1.5 to 2.5, with –1.5, 0, and 2.5 corresponding to least, average, and most independence, respectively. The following table gives the values for various countries. (Source: Harvard University; The World Bank.)

Country	Independence	Rating
New Zealand	– 1.4	7.6
Italy	–.75	7.2
Belgium	.3	4.0
France	.4	6.0
Canada	.9	4.5
United States	1.6	4.0
Switzerland	2.2	3.1

(a) Obtain the least-squares line that fits these data.

(b) What relationship between independence of banks and inflation is indicated by the least-squares line?

(c) Japan has a .6 independence rating. Use the least-squares line to estimate Japan’s inflation rate.

(d) The inflation rate for Britain is 6.8. Use the least-squares line to estimate Britain’s independence rating.