R HW2 - Statistical Decision Making
November 2019
In this HW, you are investigating whether the purchasing power parity theorem
is correct or not. If you are not familiar with this theorem, you can check
https://www.investopedia.com/updates/purchasing-power-parity-ppp.
In data set ppp, there are 40 counties with information about inflation difference
and their exchange rate changes. You are interested in finding the marginal
effect of inflation difference on exchange rate change.
Question 1:
Plot the exchange rate change v.s. inflation difference. Comment on it.
Question 2:
Estimate an OLS model for the relation between inflation difference and exchange
rate change (Notice that base on ppp theorem, inflation differnce should
be independent variable). Write down the model you are estimating.
Question 3:
Investigate the OLS assumptions base on the 4 plots we discussed at class.
Question 4:
A new data for a country shows that this country has −0.68 inflation difference.What
is your model’s prediction for exchange rate exchange?