Stockton University of New Jersey Relative Purchasing Power Parity Spreadsheet

NGP71

Economics

Stockton University of New Jersey

Question Description

Finance Mini case to Examine the validity of relative purchasing power parity (RPPP) between 2 countries

instructions attached

All data is already set up in the excel file, just need the problems solved and 3 paragraph word document interpreting results

Unformatted Attachment Preview

FINA 3600 Minicase 1: Turkish Lira, Egyptian Pound and Purchasing Power Parity Objective: Examine the validity of relative purchasing power parity (RPPP) Due date: November 18th, 11:59 pm This minicase weighs 7% of your overall grade. Requirements: Please read the following minicase and test whether the relative purchasing power parity holds for the Turkish lira–U.S. dollar and Egyptian Pound–U.S. dollar exchange rates. Prominent Currency Fund specializes in investing in currency markets of the world. Mr. Jack Hancock, an experienced hand in international investment and your boss, is currently interested in Turkish and Egyptian currency markets. He is quite concerned with the volatile exchange rates of the Turkish lira and Egyptian pound. He would like to understand what drives Turkish and Egyptian exchange rates. Because the inflation rates are much higher in Turkey and Egypt than in the United States, he thinks that purchasing power parity may be holding at least to some extent. As a research assistant for him, you are assigned to check this out. In other words, you have to study and prepare a report on the following question: Does purchasing power parity hold for the Turkish lira–U.S. dollar and Egyptian pound–U.S. dollar exchange rates? Among other things, Mr. Hancock would like you to do the following: 1. State the relative purchasing power parity (RPPP). You can refer to powerpoint slides in chapter 6 for RPPP. 2. Download the historical inflation rates for Turkey, Egypt, and the U.S., and the historical exchange rates of Turkish liras per U.S. dollar and the exchange rates of Egyptian pounds per U.S. dollar from 1989 to 2019. The historical inflation rates are available on the websites of Inflation.eu and The World Bank, while the exchange rate data are available on the websites of the Central Bank of the Republic of Turkey and the Central Bank of Egypt. It takes time to download and organize the data. To make this task easier for you, I supply you the required data in the Excel file of Minicase1 data.xlsx. 3. Please perform a regression analysis with the data. Regress the annual rate of exchange rate changes on the annual inflation rate differential to estimate the intercept and the slope coefficient, and interpret the regression results. More specifically, the regression equations used to test the RPPP are: (π‘†π‘‡π‘…π‘Œβ„π‘ˆπ‘†π·,𝑑 βˆ’ π‘†π‘‡π‘…π‘Œβ„π‘ˆπ‘†π·,π‘‘βˆ’1 )β„π‘†π‘‡π‘…π‘Œβ„π‘ˆπ‘†π·,π‘‘βˆ’1 = 𝛼 + 𝛽(𝐼𝑛𝑓𝑇𝐾,𝑑 βˆ’ πΌπ‘›π‘“π‘ˆπ‘†,𝑑 ) + πœ€π‘‘ (1) ⁄ (π‘†πΈπΊπ‘ƒβ„π‘ˆπ‘†π·,𝑑 βˆ’ π‘†πΈπΊπ‘ƒβ„π‘ˆπ‘†π·,π‘‘βˆ’1 ) π‘†πΈπΊπ‘ƒβ„π‘ˆπ‘†π·,π‘‘βˆ’1 = 𝛼 + 𝛽(𝐼𝑛𝑓𝐸𝐺,𝑑 βˆ’ πΌπ‘›π‘“π‘ˆπ‘†,𝑑 ) + πœ€π‘‘ (2) where 𝑆 denotes the end-of-the-year exchange rate, 𝐼𝑛𝑓 is the annual inflation rate, πœ€ is the error term, and subscripts TRY, EGP, USD, TK, EG, and US, and t denote Turkish lira, Egyptian pound, U.S. dollar, Turkey, Egypt, the U.S., and year t, respectively. Please see the attached screenshots for the regression procedure in Excel. The regression outputs will be saved to another worksheet. Please rename worksheets for Turkey and Egypt to avoid confusions. Keep these worksheets in the Excel file. 1 4. After obtaining the regression results from Excel, you will conduct hypothesis testing whether 𝛽 equals 1 for Turkish lira and Egyptian Pound. That is, the inflation rate differential between two countries will be reflected in the exchange rate differential. The followings are the null and alternative hypotheses: 𝐻0 : 𝛽 = 1 π»π‘Ž : 𝛽 β‰  1 The t-statistic in the hypothesis testing is: (𝛽̂ βˆ’ 1)⁄𝑆𝑑𝑑 πΈπ‘Ÿπ‘Ÿπ‘œπ‘Ÿπ›½Μ‚ . The parameter estimate, 𝛽̂, and the standard error of 𝛽̂ can be found in the regression output. Please compute the tstatistics for the cases of Turkey and Egypt. If the RPPP holds, we will not reject the null hypothesis that 𝛽 equals 1. A rule of thumb is to compare whether the t-statistic is greater or less than the critical value of 1.96 in the two-tailed test. If the t-statistic is less than the critical value of 1.96, we won’t be able to reject the null hypothesis that 𝛽 equals 1. In other words, the null hypothesis is true at 95 percent of time. Therefore, the RPPP holds. 5. In a Word file, please put together the RPPP from Point 1, interpret the results of hypothesis testing from Point 4, and conclude whether the RPPP holds for the Turkish lira–U.S. dollar and Egyptian pound–U.S. dollar exchange rates. The length of your write-up can be in 3 paragraphs. Please submit your Excel and Word files by the due date. An Analysis Toolpak has to be installed in Excel before your proceeding to running a regression. If you use Excel from Office 365 with your Stockton’s email account, please first go to the following link and download the XLMiner Analysis ToolPak: https://appsource.microsoft.com/en-us/product/office/WA104379190?tab=Overview. Sign in your Stockton’s email account, Go portal login and password. Once you access to an Excel worksheet with XLMiner Analysis ToolPak, please save it as another file name. It is because it is a Read Only file, which is non-editable. Please see my screenshots with XLminer Analysis ToolPak under Minicase 1 tab on Blackboard. My example is only for Turkey. The t-statistic, (𝛽̂ βˆ’ 1)⁄𝑆𝑑𝑑 πΈπ‘Ÿπ‘Ÿπ‘œπ‘Ÿπ›½Μ‚ , has to be computed for Turkey and Egypt. If you have Excel installed in your desktop or laptop, an Anaylsis ToolPak has to be installed as well. Please see the screenshots with Analysis ToolPak under Minicase 1 tab on Blackboard. Again, my example is only for Turkey. The t-statistic, (𝛽̂ βˆ’ 1)⁄𝑆𝑑𝑑 πΈπ‘Ÿπ‘Ÿπ‘œπ‘Ÿπ›½Μ‚ , has to be computed for Turkey and Egypt. 2 Copy the data. Paste the data to the worksheet with XLMiner Analysis ToolPak. Beta hat Standard error Beta hat Standard error Year Inf_TK Inf_US S (TL/$) 1989 63.13% 4.83% 0.0023 1990 60.36% 5.39% 0.0029 1991 65.69% 4.25% 0.0051 1992 70.62% 3.03% 0.0086 1993 65.64% 2.95% 0.0145 1994 103.17% 2.61% 0.0387 1995 92.44% 2.81% 0.0597 1996 80.37% 2.93% 0.1078 1997 84.46% 2.34% 0.2056 1998 86.66% 1.55% 0.3145 1999 64.76% 2.19% 0.5414 2000 56.43% 3.38% 0.6734 2001 53.46% 2.83% 1.4501 2002 47.20% 1.59% 1.6437 2003 21.94% 2.27% 1.3966 2004 8.60% 2.68% 1.3395 2005 8.19% 3.39% 1.3451 2006 9.59% 3.24% 1.4090 2007 8.78% 2.85% 1.1708 2008 10.43% 3.85% 1.5255 2009 6.28% -0.34% 1.4909 2010 8.58% 1.64% 1.4901 2011 6.45% 3.16% 1.6029 2012 8.94% 2.07% 1.7868 2013 7.49% 1.47% 2.1382 2014 8.85% 1.62% 2.2610 2015 7.67% 0.12% 2.9211 2016 7.78% 1.26% 3.5288 2017 11.13% 2.13% 3.7753 2018 16.22% 2.44% 5.2858 2019 15.46% 1.81% 5.9454 (St - St-1)/St-1 Inf_TK - Inf_US Year Inf_EG Inf_US S (EP/$) 1989 21.26% 4.83% 1.1000 1990 16.76% 5.39% 2.0000 1991 19.75% 4.25% 3.3322 1992 13.64% 3.03% 3.3386 1993 12.09% 2.95% 3.3718 1994 8.15% 2.61% 3.3910 1995 15.74% 2.81% 3.3900 1996 7.19% 2.93% 3.3880 1997 4.63% 2.34% 3.3880 1998 3.87% 1.55% 3.3880 1999 3.08% 2.19% 3.4050 2000 2.68% 3.38% 3.6900 2001 2.27% 2.83% 4.4900 2002 2.74% 1.59% 4.5000 2003 4.51% 2.27% 6.1532 2004 11.27% 2.68% 6.1314 2005 4.87% 3.39% 5.7322 2006 7.64% 3.24% 5.7036 2007 9.32% 2.85% 5.5038 2008 18.32% 3.85% 5.5041 2009 11.76% -0.34% 5.4854 2010 11.27% 1.64% 5.8049 2011 10.05% 3.16% 6.0319 2012 7.12% 2.07% 6.3190 2013 9.42% 1.47% 6.9386 2014 10.15% 1.62% 7.1401 2015 10.36% 0.12% 7.7301 2016 13.81% 1.26% 18.2665 2017 29.51% 2.13% 17.7277 2018 14.40% 2.44% 17.9136 2019 9.15% 1.81% 16.0416 (St - St-1)/St-1 Inf_EG - Inf_US ...
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Final Answer

Attached. Please let me know if you have any questions or need revisions.

Year Inf_TK
Inf_US
S (TL/$)
1989
63.13%
4.83%
0.0023
1990
60.36%
5.39%
0.0029
1991
65.69%
4.25%
0.0051
1992
70.62%
3.03%
0.0086
1993
65.64%
2.95%
0.0145
1994
103.17%
2.61%
0.0387
1995
92.44%
2.81%
0.0597
1996
80.37%
2.93%
0.1078
1997
84.46%
2.34%
0.2056
1998
86.66%
1.55%
0.3145
1999
64.76%
2.19%
0.5414
2000
56.43%
3.38%
0.6734
2001
53.46%
2.83%
1.4501
2002
47.20%
1.59%
1.6437
2003
21.94%
2.27%
1.3966
2004
8.60%
2.68%
1.3395
2005
8.19%
3.39%
1.3451
2006
9.59%
3.24%
1.4090
2007
8.78%
2.85%
1.1708
2008
10.43%
3.85%
1.5255
2009
6.28%
-0.34%
1.4909
2010
8.58%
1.64%
1.4901
2011
6.45%
3.16%
1.6029
2012
8.94%
2.07%
1.7868
2013
7.49%
1.47%
2.1382
2014
8.85%
1.62%
2.2610
2015
7.67%
0.12%
2.9211
2016
7.78%
1.26%
3.5288
2017
11.13%
2.13%
3.7753
2018
16.22%
2.44%
5.2858
2019
15.46%
1.81%
5.9454

(St - St-1)/St-1 Inf_TK - Inf_US

26.09%
75.86%
68.63%
68.60%
166.90%
54.26%
80.57%
90.72%
52.97%
72.15%
24.38%
115.34%
13.35%
-15.03%
-4.09%
0.42%
4.75%
-16.91%
30.30%
-2.27%
-0.05%
7.57%
11.47%
19.67%
5.74%
29.20%
20.80%
6.99%
40.01%
12.48%

54.97%
6...

xnvfuniref92 (183)
Carnegie Mellon University

Anonymous
Really useful study material!

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