EC3143 Quantitative Methods: Empirical Econometrics

a.) Find the ACF and the PACF of

• The real exchange rate; and
• the first difference of the real exchange rate

Comment on your results.

b.) Is it possible to determine whether the series are stationary or not, just by simple examination of the ACF and the PACF, as in part (a)?

c.) Use the DF or ADF (where appropriate) to test whether your series is a unit root process. What do you conclude?

d.) Why is it important to include the appropriate lag length and how would you do this?

e.) Test your series for stationarity using a different testing methodology than that used in part c and compare your results.

f.) Using your results comment on the validity of the theory of Purchasing Power Parity.

g.) A suggested method to induce stationarity is to difference the data. Examine whether this method works in this case for your series.

h.) Using the Box-Jenkins modelling procedure, run six different ARMA models on the first difference of your series.

Comment on your results.

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