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International Macroeconomics: MSc Economics Week 1: Question 1 Peter Stanley, David Glover, Daniel Funge and Bruce Moniri

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(a) Import the data into EViews 6. Go to file – open – Foreign Data Workfile Choose relevant file/data source (pppdata.xls) Format data as desired on Spreadsheet Read menu

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Data 91 products representing a good for each country Q - represents the log of relative prices Q = In([p*e]/q) p – price of an unspecified good in a non US OECD country ( x ) q – price of the same good in the US e – nom exchange rate between the US and x. Monthly data from Jan81 – Dec95 (180 observations) for each good.

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Data -7.50937808291180 ……… -7.145439293912 -7.061058539911 ……… -3.5839355182180 ……… -3.74961164222 -3.69617048121 -3.6603777711180 ……… -3.7164177212 -3.64243684911 QPanelIDDATE

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(b) Conduct unit root tests on Q reporting results with and without a trend. Process: View – Unit Root Test – choose root test (Lin-Levin or Im, Pesaran and Shin). Check menu box corresponding to trend/no trend choice.

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Results 0-18.8305trendIm, Pesaran and Shin W-stat 0-7.04755no trendIm, Pesaran and Shin W-stat 14.61616trendLevin, Lin & Chu t* 0.78340.78362no trendLevin, Lin & Chu t* Prob.**Statistic Trend/ No TrendMethod

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Does the real exchange rate have a unit root? (LL test) Interpretation of Lin Levin results: for 5% significance level. If P > 0.05 Cannot reject unit root in all series. If P < 0.05 Reject. Our P (no trend): 0.7834 With trend: 1 Therefore, we cannot reject the existence of a unit root in all series.

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Does the real exchange rate have a unit root? (IPS) Interpretation of Im, Pesaran & Shin test results: for 5% significance level. If P > 0.05 Cannot reject unit root in all series. If P < 0.05 Reject. Our P (no trend): 0 With trend: 0 Therefore, we can reject the existence of a unit root in all series, i.e. IPS suggests that at least one series is stationary.

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(c) Estimate an AR(1) Model for Q using the fixed effects estimator. Fixed effects requires the creation of a dummy for each panel cross section. EViews will do this for you if you ensure your data is set in a recognised panel format. Process: Quick – Estimate Equation – Type equation as Q = C(1) + C(2)*Q(-1) - select fixed effects in panel options.

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Results 0715.09810.0013780.985667Q(-1) 0-10.31190.005007-0.05163C Prob.t-StatisticStd. ErrorCoefficient

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What is the half-life for the real exchange rate? Take coefficient 0.985667 from fixed effects panel regression. Using 1 as the t=1 value, calculate number of periods required to take series value to 0.5. Using formula: log(0.5)/log(p)=log(0.5)/log(0.985667)=48.01

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Half-life

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(d) Estimate an AR(1) model for each good separately. Process: un-stack the data using the reshape current page function in EViews. This splits panel data into separate cross- sections. Then run an AR(1) on each separate cross- section. Results – Mean: 0.9811, Standard Deviation: 0.02339

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Results

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