Example 212

THE U.S./U.K. EXCHANGE RATE: JANUARY 1, 1973, TO OCTOBER 10, 1996

Figure 21.11 gives the graph of the ($/£) exchange rate from January 1973 to October 1996, for a total of 286 observations. By now you should be able to spot this time series as non-stationary. Carrying out the unit root tests, we obtained the following t statistics: -1.2749 (no intercept, no trend), -1.7710 (intercept), and -1.6269 (intercept and trend). Each of these statistics, in absolute value, was less than its critical t value from the appropriate DF tables, thus confirming the graphical impression that the U.S./U.K. exchange rate time series is nonstationary.

AMt = 0.2618 + 0.0159t - 0.0044Mt-1 t = (0.7919) (4.4227) (-3.0046)

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