Name: Lediglich Setyowati

Student ID: 1103342130

Homework Task 2 (the topic of PPP-cointegration) Apr. 2015

This assignment employing data coming from two countries, namely Singapore as home-based foreign and United States because foreign countries. Examining the reality of PPP, I use Johansen (1988) cointegration, then the outcomes of product root checks are summarized as the subsequent table. Besides, according to the outcomes of Johansen (1988) cointegration, I help to make some inferences to discuss whether the PPP applies or not really.

1 . Carrying out of check for quantity of cointegrating vectors.

Table 1 ) Johansen's Cointegration Test

Search for

λmax

Style

Statistics

5% critical worth

Statistics

5% critical value

r=0

eighty. 53863**

thirty five. 19275

sixty. 34169**

twenty-two. 29962

r=1

20. 19693

20. 26184

17. 93888

15. 89210

r=2

2 . 258050

on the lookout for. 164546

2 . 258050

on the lookout for. 164546

Notes: ** denotes relevance at five per cent level and 5% limited sample critical values are constructed from the asymptotic critical values from Osterwald_Lenum (1992) using the technique of Cheung and Lai (1993). Here r is cointegration rank.

Johansen's (1988) cointegration test is utilized for examining the long run-relationship. Before doing cointegration test, first of all I will determine about the quantity of lags of VAR through the use of SC and AIC. In respect to SOUTH CAROLINA result, we get the separation number is usually 2 . Furthermore, I executed the test to get the number of cointegrating vectors. Based on the result by table 1, we can see there is one cointegration from Trace and λmax which means that ur = zero in both of them is rejecting H0. In line with the results of the Trace and λmax, we confirm that among the variables there is a stable long-run equilibrium marriage.

installment payments on your The effects of the cointegrated coefficients of the long-run romantic relationship equation are as equation (1)

lne + 1 ) 659305 lnpsgd-0. 861759 lnpus – four. 321050 sama dengan 0(1)

Formula (1) can also rewrite as the following

lne = -1. 659305 lnpsgd +0. 861759 lnpus + 4. 321050(2)

According to the effects of cointegration, from formula (2), the coefficient of lnpsgd is negative and lnpus is usually positive, which will implies that the increasing of Singapore's inflation will or decreasing inflation of the US will reduced exchange charge of SGD/US\$. The coefficient's signs are inconsist while using PPP theory.

3. Vintage version of PPP to support, the normalized cointegration rapport in formula (1) ought to equal to the vector (1, -1, 1). This indicates the existence of one to one relationship among prices and exchange prices and allow randomly deviations in real exchange rate. Consequently , I will employ Johanshen and Juselius' (1990) approach by computing a X2 figure for the test under the null hypothesis the cointegrating vector is (1, -1, 1).

Table installment payments on your Johanshen and Juselius' (1990) test intended for cointegration Vector (1, -1, 1) X2 statistic

doze. 86558

P-value

0. 001608

According to the benefits of table 2, the null speculation, the cointegrating vector becoming (1, -1, 1) can not be accepted by 5% value level for the reason that p-value is actually low, so that it can decline the null hypothesis. One the other side of the coin words, this results discover the evidence to aid weak indicate reversion and deviations may possibly persist in the long term. The results of Eviews

VAR Limitations

VAR Lag Order Assortment Criteria

Endogenous variables: LNE LNPSGD LNPUS�

Exogenous variables: C�

Date: 04/07/15 Period: 20: 53

Sample: 1991M10 2012M06

Included observations: 241

Lag

LogL

LR

FPE

AIC

SOUTH CAROLINA

HQ

0

922. 6145

NA�

on the lookout for. 73e-08

-7. 631655

-7. 588276

-7. 614179

one particular

2641. 710

3381. 126

6. 68e-14

-21. 82332

-21. 64980

-21. 75341

2

2685. 326

84. 69792

five. 01e-14

-22. 11059

-21. 80694*

-21. 98825

three or more

2695. 270

19. 06190

4. 97e-14

-22. 11842

-21. 68463

-21. 94365

4

2716. 146

39. 50043

5. 51e-14

-22. 21698

-21. 65305

-21. 98978*

a few

2729. 492

24. 92008

4. 35e-14*

-22. 25305*

-21. 55898

-21. 97342...