Project Using the Web Site Database:
One Would Expect That $\bullet$

question 1

Essay

Project using the Web site database:
One would expect that PPP would be better verified for countries with high inflation. Look at the validity of PPP for Latin American countries relative to the United States.
$\bullet$ Take the end-of-quarter consumer price index data for a sample of high-inflation emerging countries and the United States for a period of ten years or more. For each country, divide its price index by that of the United States to obtain its relative price index.
$\bullet$ Take end-of-quarter exchange rates against the U.S. dollar.
$\bullet$ For each country, perform various statistical tests to compare the two series. For example, you can first plot them, using a common base. You can also calculate their quarterly percent variation and compare the means of the two series (average inflation differential and average depreciation of the currency). You could do a regression of the quarterly exchange rate variations on the quarterly inflation differential and look at the regression coefficients, as well as at the R-square.
$\bullet$ Do a similar calculation for some developed countries (e.g., Japan, Germany, and the United Kingdom) relative to the United States. Are the conclusions similar?

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