international macroeconomics: msc economics week 1: question 1 peter stanley, david glover, daniel...
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International Macroeconomics: MSc Economics
Week 1: Question 1
Peter Stanley, David Glover, Daniel Funge and Bruce Moniri
(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
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 Jan’81 – Dec’95 (180
observations) for each good.
Data
-7.50937808291180
………
-7.145439293912
-7.061058539911
………
-3.5839355182180
………
-3.74961164222
-3.69617048121
-3.6603777711180
………
-3.7164177212
-3.64243684911
QPanelIDDATE
(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.
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
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.
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.
(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.
Results
0715.09810.0013780.985667Q(-1)
0-10.31190.005007-0.05163C
Prob. t-StatisticStd. ErrorCoefficient
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
Half-lifeDecay of real exchange rate
0
0.2
0.4
0.6
0.8
1
1.2
1 6 11 16 21 26 31 36 41 46 51 56 61 66 71
q
(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
Results
Distribution of AR(1) Coefficients
010203040506070
0.87
3065
0.88
7114
0.90
1162
0.91
5211
0.92
9260
0.94
3308
0.95
7357
0.97
1406
0.98
5454
0.99
9999