The continuous depreciation of the Ghana cedis against major trading currencies

Question

The continuous depreciation of the Ghana cedis against major trading currencies and accompanied increase in domestic is worrying to the bank of ghana. A researcher at the bank sought to examine the level of exchange rate pass-through (ERPT) to domestic prices from four major currencies, US dollar,UK pound,UK pound, Euro and Japanese Yen. The researcher has two options,either to estimte the level of exchange pass through to each currency or combined level of pass-through.Inference from the law of one price and Literature reviewed suggested this estimable/functional regression equation:

a) state the general regression representation for time series and panel anslysis

b)State the Autoregressive Distributed Lags (ARDL(1,0,0,2)) representations for each of the time series and panel regressions stated in 3 (1)above.

c.write the error correction model for the time series representation in 3 (1) and explain all the terms

d.Explain how you will implement Engle and Granger cointegration for time series models.

Explanation / Answer

a) General Regression representation for time series and panel analysis:

General Linear Model is the foundation of linear panel model estimation

o Ordinary Least Squares (OLS)

o Weighted least squares (WLS)

o Generalized least squares (GLS)

Least-squares estimation of panel models typically entails three steps:

(i) Data transformation or first-stage estimation

(ii) Estimation of the parameters using Ordinary Least Squares

(iii) Estimation of the variance-covariance matrix of the estimates (VCE)

Parameter estimates are sometimes refined using iteratively reweighted least squares (IRLS), a maximum likelihood estimator.

Panel analysis may be appropriate even if time is irrelevant. Panel models using cross-sectional data collected at fixed periods of time generally use dummy variables for each time period in a two-way specification with fixed-effects for time.

b)

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