Question Consider the following econometric structural model of the USD/AUD exchange rate: AUSD/AUD,= Bo + BLAGDP Aus,t + BRAGDPut + B3InfRD,+ B.IntRD,+ Et (1) where AUSD/AUD, is the change in the USD/AUD exchange rate over period t. AGDP is the annual percentage growth rate in real GDP over period t InfRD is the inflation rate differential for period t IntRD, is the interest rate differential for period t Table 1 below summarises the regression output of the model presented in Equation 1 using selected forecast horizons: a 1-quarter horizon, 1-year horizon and a 3-year horizon. Table 1. Variable/Particular 1-quarter 1-year horizon 3-year horizon horizon 0.005 0.027 0.708 Intercept (0.732) (0.421) (0.000) 0.802 1.697 -1.260 Real GDP Growth Aus. (0.304) (0.307) (0.502) -1.041 -2.363 (0.03) 1.162 Real GDP Growth US (0.063) (0.180) 1.079 2.775 -0.940 Inflation Rate Differential (0.222) (0.114) (0.597) -0.818 -2.738 12.151 Interest Rate Differential (0.439) (0.183) (0.000) Adjusted R-squared 4.20% 9.83% 41.22% F-stat 1.749 2.772 10.991 (0.150) (0.035) (0.000) Number of observations 69 66 58 Note: all numbers appearing in parentheses are p-values. You will need to refer to Table 1 to answer the questions below. Provide concise responses. b. Consider both the F-statistic (at the 5% level of significance) and the adjusted R-squared as the forecast horizon increases from 1 quarter to 3 years. Interpret these figures for the 3-year horizon output in Table 1. Provide some commentary and briefly discuss whether such results are consistent with PPP theory. (1 mark) Question Consider the following econometric structural model of the USD/AUD exchange rate: AUSD/AUD,= Bo + BLAGDP Aus,t + BRAGDPut + B3InfRD,+ B.IntRD,+ Et (1) where AUSD/AUD, is the change in the USD/AUD exchange rate over period t. AGDP is the annual percentage growth rate in real GDP over period t InfRD is the inflation rate differential for period t IntRD, is the interest rate differential for period t Table 1 below summarises the regression output of the model presented in Equation 1 using selected forecast horizons: a 1-quarter horizon, 1-year horizon and a 3-year horizon. Table 1. Variable/Particular 1-quarter 1-year horizon 3-year horizon horizon 0.005 0.027 0.708 Intercept (0.732) (0.421) (0.000) 0.802 1.697 -1.260 Real GDP Growth Aus. (0.304) (0.307) (0.502) -1.041 -2.363 (0.03) 1.162 Real GDP Growth US (0.063) (0.180) 1.079 2.775 -0.940 Inflation Rate Differential (0.222) (0.114) (0.597) -0.818 -2.738 12.151 Interest Rate Differential (0.439) (0.183) (0.000) Adjusted R-squared 4.20% 9.83% 41.22% F-stat 1.749 2.772 10.991 (0.150) (0.035) (0.000) Number of observations 69 66 58 Note: all numbers appearing in parentheses are p-values. You will need to refer to Table 1 to answer the questions below. Provide concise responses. b. Consider both the F-statistic (at the 5% level of significance) and the adjusted R-squared as the forecast horizon increases from 1 quarter to 3 years. Interpret these figures for the 3-year horizon output in Table 1. Provide some commentary and briefly discuss whether such results are consistent with PPP theory. (1 mark)
