Question

3.Below is the regression input and output (from Excel) for the regression in which the percentage change in the exchange rate is the dependent variable (Y) and the inflation differential (inflation rate home – inflation rate foreign) is the independent variable (X). According to the Purchasing Power Parity theory, the hypothesized coefficients (null hypothesis) in the regression are 0 (intercept coefficient) and 1 (inflation differential coefficient).   The directions for Problem Set 1 instruct you to first read sections of the Madura textbook. You will need to do this to learn how to test if a coefficient is different from 1; it will explain how you calculate the t Statistic to test your null hypothesis from the Excel output. Excel will only directly provide a t statistic for the test of whether a coefficient is different from 0.   

%chg ex rate	Inf h - Inf f
0.01	0.009
0.02	0.015
0.01	0.015
0.02	0.022
-0.01	-0.005
SUMMARY OUTPUT
Regression Statistics
Multiple R	0.944392193
R Square	0.891876615
Adjusted R Square	0.855835487
Standard Error	0.004650234
Observations	5
ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.000535126	0.000535126	24.74607916	0.015609229
Residual	3	6.4874E-05	2.16247E-05
Total	4	0.0006
	Coefficients	Standard Error	t Stat	P-value	Lower 95%
Intercept	-0.002751938	0.003300932	-0.833685033	0.465627737	-0.013256988
Inf h - Inf f	1.138565891	0.228878485	4.974543111	0.015609229	0.410171719

3a.       Is there evidence to reject the null hypothesis that the intercept coefficient is equal to 0 at the 5% level of significance? (Hint: you will need a table with the t distribution to determine the critical t.) (10 points)

3b.       Is there evidence to reject the null hypothesis that the inflation differential coefficient (Inf h – Inf f) is equal to 1 at the 5% level of significance? (Hint: you will need a table with the t distribution to determine the critical t. You will not use the t Statistic given in the Excel output, because it corresponds to the null hypothesis that the inflation differential is equal to 0.) (10 points)

3c.       Overall, is there any evidence inconsistent with the Purchasing Power Parity theory? (Hint: The answer to this questions is yes, if you can reject at least one of the two above null hypotheses.) (10 point)

Answer 1