There Has Been Much Talk Recently About the Convergence of Inflation

question 26

Essay

There has been much talk recently about the convergence of inflation rates between many
of the OECD economies.You want to see if there is evidence of this closer to home by
checking whether or not Canada's inflation rate and the United States' inflation rate are
cointegrated.
(a)You begin your numerical analysis by testing for a stochastic trend in the variables, using
an Augmented Dickey-Fuller test.The t-statistic for the coefficient of interest is as
follows: $$\begin{array} { | c | c | c | c | c | } \hline \begin{array} { c } \text { Variable with } \\\text { lag of 1 }\end{array} & \text { InfCan } & \Delta \text { InfCan } & \text { InfUS } & \Delta \text { InfUS } \\\hline t \text {-statistic } & - 1.93 & - 6.38 & - 2.37 & - 5.63 \\\hline\end{array}$$ where InfCan is the Canadian inflation rate, and InfUS is the United States inflation rate.
The estimated equation included an intercept.For each case make a decision about the
stationarity of the variables based on the critical value of the Augmented Dickey-Fuller
test statistic.

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Definitions:

Virginia

A state in the southeastern United States, known for its significant history in the founding of America, including being the site of the first permanent English settlement in Jamestown.

Maryland's Founder

Refers to George Calvert, 1st Lord Baltimore, who played a pivotal role in the founding of the Province of Maryland as a haven for English Catholics.

Cecilius Calvert

The second Lord Baltimore, an English nobleman who founded the colony of Maryland in the 17th century as a haven for English Catholics.

Feudal Domain

Lands during the Middle Ages under the control of a lord or noble, governed based on feudalism where peasants worked the land in exchange for military protection.