Choose two countries amongst those available in the data set. Using Consumer Price Index (CPI) data, construct series of Real Exchange Rate (RER), and compare them to the nominal exchange rates. Then perform standard tests of the PPP model (as in Froot and Rogoff, 1994).

topic: international finance

tool: test of stationarity, cointegration, ECM

Basic references:

Froot, K. and Rogoff, K., (1994), Perspectives on PPP and Long Run Real Exchange Rates, Rogoff, K., (1996), The Purchasing Power Parity Puzzle, Data set: nominal exchange rate (in National currencies per SDR, quarterly), consumer price index (quarterly, year basis 2000=100) and basic references.

US CPI

year quart cpi 1957 1 16.111 1957 2 16.2666 1957 3 16.4389 1957 4 16.5 1958 1 16.6723 1958 2 16.7945 1958 3 16.8168 1958 4 16.8168 1959 1 16.8112 1959 2 16.8723 1959 3 16.9779 1959 4 17.0613 1960 1 17.0613 1960 2 17.1669 1960 3 17.2113 1960 4 17.3058 1961 1 17.3169 1961 2 17.3225 1961 3 17.4114 1961 4 17.4336 1962 1 17.467 1962 2 17.5448 1962 3 17.6226 1962 4 17.6615 1963 1 17.6893 1963 2 17.7282 1963 3 17.856 1963 4 17.906 ........

uk cpi

year quart cpi 1957 1 6.90317 1957 2 6.94247 1957 3 7.03416 1957 4 7.11275 1958 1 7.13895 1958 2 7.24374 1958 3 7.15205 1958 4 7.25684 1959 1 7.28304 1959 2 7.23065 1959 3 7.21755 1959 4 7.25684 1960 1 7.26994

.......

US exchange rates

year quart exra 1957 1 1 1957 2 1 1957 3 1 1957 4 1 1958 1 1 1958 2 1 1958 3 1 1958 4 1 1959 1 1 1959 2 1 1959 3 1 1959 4 1 1960 1 1 1960 2 1 1960 3 1 1960 4 1 1961 1 1 1961 2 1 1961 3 1 .......

Uk exchange rates

year quart exra 1957 1 .36 1957 2 .36 1957 3 .36 1957 4 .35 1958 1 .36 1958 2 .36 1958 3 .36 1958 4 .36 1959 1 .36 1959 2 .36 1959 3 .36 1959 4 .36 1960 1 .36 1960 2 .36 1960 3 .36 1960 4 .36

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小妹初学，在这里先谢过大家了。