Finance 524

Mudigere Vasanthakumar Puneeth

Banner Id-@03021525

Empirical test For Relative Purchasing Power Parity

In todays globalized world the exchange rate of a countrys currency plays a vital role in the
economy. Apart from interest rates, inflation, GDP etc. the exchange rate is one of the most
important factor which determines the financial health of a country. The theory of relative
purchasing power parity examines the relative changes in price levels between two countries
and maintains that exchange rates will change to compensate for inflation differentials .
In this test I have chosen five countries namely South Korea, France, Sweden, South Africa and
Poland to test whether the theory of relative purchasing power parity holds good between
these countries and the United States. And the formula to calculate the normative exchange
rate is:
Et = E0 (1+ih/1+if),
Where Et is the exchange rate at time t, E0 is the exchange rate at period 0 and ih is the
inflation of home country which is USA in our case and if is the inflation of foreign country. The
data taken for the analysis include five years (January-2009 to December-2013) of average
monthly consumer price indexes (CPI) of the respective countries, base year being 2007. And
the actual exchange rates of respective countries for the same period. Then the percentage
change in CPI is calculated for both the countries that are being analyzed. The Inflation
differential has been computed by taking the % change in US CPI minus the % change in foreign
country CPI divided by one plus the % change in foreign country CPI. The normative exchange
rate is computed using the above equation.
A regression in run by taking the percentage change in exchange rate as dependent variable(Y)
and inflation rate differential as independent variable(X). The regression equation is Y=
a+b(inflation rate differential).

For USA and South Korea

USA CPI
Date

CPI

2008-12-01
2009-01-01
2009-02-01
2009-03-01
2009-04-01
2009-05-01
2009-06-01
2009-07-01
2009-08-01
2009-09-01
2009-10-01
2009-11-01
2009-12-01
2010-01-01
2010-02-01
2010-03-01
2010-04-01
2010-05-01
2010-06-01
2010-07-01
2010-08-01
2010-09-01
2010-10-01
2010-11-01
2010-12-01
2011-01-01
2011-02-01
2011-03-01
2011-04-01
2011-05-01
2011-06-01
2011-07-01
2011-08-01
2011-09-01
2011-10-01
2011-11-01
2011-12-01
2012-01-01
2012-02-01
2012-03-01
2012-04-01
2012-05-01
2012-06-01
2012-07-01
2012-08-01
2012-09-01
2012-10-01
2012-11-01
2012-12-01
2013-01-01
2013-02-01
2013-03-01
2013-04-01
2013-05-01
2013-06-01
2013-07-01
2013-08-01
2013-09-01
2013-10-01
2013-11-01
2013-12-01

99.98
100.23
100.60
100.50
100.60
100.75
101.58
101.55
101.89
102.09
102.39
102.74
102.79
102.85
102.75
102.77
102.80
102.77
102.76
102.95
103.11
103.23
103.58
103.83
104.25
104.56
104.90
105.44
105.96
106.37
106.41
106.67
106.95
107.20
107.24
107.42
107.40
107.67
107.89
108.18
108.39
108.25
108.22
108.20
108.75
109.29
109.56
109.34
109.30
109.40
110.00
109.76
109.58
109.78
110.13
110.31
110.40
110.55
110.56
110.68
110.95

REGRERSSION OUTPUT

South Korea

CPI

0.231%
0.364%
-0.099%
0.101%
0.147%
0.830%
-0.030%
0.335%
0.193%
0.300%
0.335%
0.052%
0.055%
-0.099%
0.025%
0.033%
-0.035%
-0.006%
0.180%
0.154%
0.123%
0.340%
0.237%
0.407%
0.293%
0.332%
0.513%
0.494%
0.385%
0.032%
0.250%
0.264%
0.232%
0.038%
0.165%
-0.019%
0.252%
0.207%
0.260%
0.198%
-0.131%
-0.026%
-0.020%
0.513%
0.493%
0.245%
-0.199%
-0.039%
0.096%
0.552%
-0.225%
-0.159%
0.180%
0.317%
0.168%
0.078%
0.133%
0.017%
0.107%
0.240%

104.14
104.23
104.99
105.74
106.02
106.02
105.93
106.30
106.68
106.77
106.49
106.68
107.06
107.90
108.12
108.34
108.77
108.88
108.77
108.99
109.54
110.41
110.41
109.87
110.30
111.61
112.38
112.81
112.92
113.14
113.36
113.91
114.67
114.56
114.34
114.45
114.89
115.35
115.79
115.82
115.81
116.01
115.85
115.59
116.12
116.95
116.74
116.32
116.53
117.23
117.62
117.51
117.35
117.35
117.21
117.46
117.87
118.10
117.74
117.72
117.86

0.090%
0.722%
0.717%
0.266%
0.000%
-0.089%
0.356%
0.353%
0.089%
-0.265%
0.176%
0.353%
0.790%
0.202%
0.202%
0.403%
0.100%
-0.100%
0.201%
0.501%
0.798%
0.000%
-0.495%
0.398%
1.188%
0.685%
0.389%
0.097%
0.193%
0.193%
0.482%
0.671%
-0.095%
-0.191%
0.096%
0.382%
0.399%
0.379%
0.028%
-0.009%
0.179%
-0.141%
-0.226%
0.463%
0.715%
-0.187%
-0.356%
0.178%
0.600%
0.335%
-0.093%
-0.139%
0.000%
-0.121%
0.214%
0.353%
0.195%
-0.305%
-0.019%
0.121%

Inflation
% change
USD/KRW
USD/KRW
Difference
Rate
in
Actual(A)
Normative(B)
(A-B)
differential
Exchange
0.0007
0.140%
0.0007
0.0000
0.0007
0.00000
-0.355%
0.0007
0.0000
0.0007
0.00000
-0.810%
0.0007
0.0000
0.0007
0.00001
-0.165%
0.0007
0.0000
0.0007
0.00000
0.147%
0.0008
14.2857
0.0007
0.00010
0.919%
0.0008
0.0000
0.0008
-0.00001
-0.384%
0.0008
0.0000
0.0008
0.00000
-0.018%
0.0008
0.0000
0.0008
0.00000
0.104%
0.0008
0.0000
0.0008
0.00000
0.567%
0.0008
0.0000
0.0008
0.00000
0.158%
0.0009
12.5000
0.0008
0.00010
-0.300%
0.0009
0.0000
0.0009
0.00000
-0.729%
0.0009
0.0000
0.0009
0.00001
-0.301%
0.0009
0.0000
0.0009
0.00000
-0.177%
0.0009
0.0000
0.0009
0.00000
-0.369%
0.0009
0.0000
0.0009
0.00000
-0.136%
0.0009
0.0000
0.0009
0.00000
0.094%
0.0008
-11.1111
0.0009
-0.00010
-0.020%
0.0008
0.0000
0.0008
0.00000
-0.345%
0.0008
0.0000
0.0008
0.00000
-0.669%
0.0009
12.5000
0.0008
0.00011
0.340%
0.0009
0.0000
0.0009
0.00000
0.736%
0.0009
0.0000
0.0009
-0.00001
0.009%
0.0009
0.0000
0.0009
0.00000
-0.885%
0.0009
0.0000
0.0009
0.00001
-0.351%
0.0009
0.0000
0.0009
0.00000
0.124%
0.0009
0.0000
0.0009
0.00000
0.397%
0.0009
0.0000
0.0009
0.00000
0.191%
0.0009
0.0000
0.0009
0.00000
-0.161%
0.0009
0.0000
0.0009
0.00000
-0.230%
0.0009
0.0000
0.0009
0.00000
-0.404%
0.0009
0.0000
0.0009
0.00000
0.328%
0.0009
0.0000
0.0009
0.00000
0.229%
0.0009
0.0000
0.0009
0.00000
0.070%
0.0009
0.0000
0.0009
0.00000
-0.399%
0.0009
0.0000
0.0009
0.00000
-0.146%
0.0009
0.0000
0.0009
0.00000
-0.171%
0.0009
0.0000
0.0009
0.00000
0.232%
0.0009
0.0000
0.0009
0.00000
0.207%
0.0009
0.0000
0.0009
0.00000
-0.310%
0.0009
0.0000
0.0009
0.00000
0.116%
0.0009
0.0000
0.0009
0.00000
0.207%
0.0009
0.0000
0.0009
0.00000
0.050%
0.0009
0.0000
0.0009
0.00000
-0.220%
0.0009
0.0000
0.0009
0.00000
0.432%
0.0009
0.0000
0.0009
0.00000
0.157%
0.0009
0.0000
0.0009
0.00000
-0.217%
0.0009
0.0000
0.0009
0.00000
-0.501%
0.0009
0.0000
0.0009
0.00000
0.216%
0.0009
0.0000
0.0009
0.00000
-0.133%
0.0009
0.0000
0.0009
0.00000
-0.019%
0.0009
0.0000
0.0009
0.00000
0.180%
0.0009
0.0000
0.0009
0.00000
0.439%
0.0009
0.0000
0.0009
0.00000
-0.046%
0.0009
0.0000
0.0009
0.00000
-0.275%
0.0009
0.0000
0.0009
0.00000
-0.062%
0.0009
0.0000
0.0009
0.00000
0.323%
0.0009
0.0000
0.0009
0.00000
0.126%
0.0009
0.0000
0.0009
0.00000
0.119%
0.0009
0.0000
0.0009
0.00000

Regression Statistics
Multiple R
0.065119248
R Square
0.004240516
Adjusted R
Square
-0.01292775
Standard Error
3.280428626
Observations
60
ANOVA
df
Regression
Residual
Total

1
58
59

Coefficients
Intercept
Inflation rate
differential

0.449972532
60.28236503

SS
2.657990867
624.1502942
626.808285
Standard
Error
0.425334595
121.2953448

MS
2.657990867
10.76121197

F
0.246997353

Significance
F
0.621076008

t Stat

P-value

Lower 95%

1.057926014
0.496988282

0.294475514
0.621076008

0.401427163
303.0813774

Upper 95%
1.301372228
182.5166473

Y=0.449-60.282(Interest rate differential).

The coefficient of determination R2= 0.0042 which means that 0.42% of the variation in the exchange
rate is explained by the variation in inflation differential. F-statistic=0.24 which is much lesser than
critical value of 4.0 so the null hypothesis that coefficients =0 cannot be rejected.
The intercept is statistically insignificant since the t-statistic is 1.057 which is lesser than the critical
value 2.0 and the P-value is greater than 0.05 and implies that we cannot reject the fact that the
coefficient will be equal to zero. The t-statistic for inflation rate differential is 0.496 which is less than
the critical value 2.0 and the P-value is 0.62 which is greater than the critical value 0.05. So we fail to
reject the null hypothesis that the coefficient of inflation rate differential is 0. Looking at these values
we can say that they are statistically insignificant and the model is not fitting the data.

For USA and France

%

CPI

Inflation
Rate
differential

0.231%
0.364%
-0.099%
0.101%
0.147%
0.830%
-0.030%
0.335%
0.193%
0.300%
0.335%
0.052%
0.055%
-0.099%
0.025%
0.033%
-0.035%
-0.006%
0.180%
0.154%
0.123%
0.340%
0.237%
0.407%
0.293%
0.332%
0.513%
0.494%
0.385%
0.032%
0.250%
0.264%
0.232%
0.038%
0.165%
-0.019%
0.252%
0.207%
0.260%
0.198%
-0.131%
-0.026%
-0.020%
0.513%
0.493%
0.245%
-0.199%
-0.039%
0.096%
0.552%
-0.225%
-0.159%
0.180%
0.317%
0.168%
0.078%
0.133%
0.017%
0.107%
0.240%

101.00
100.59
100.97
101.16
101.32
101.47
101.60
101.15
101.67
101.42
101.51
101.65
101.92
101.69
102.26
102.75
103.02
103.14
103.13
102.84
103.08
103.00
103.14
103.25
103.72
103.47
103.96
104.81
105.17
105.23
105.31
104.84
105.39
105.31
105.56
105.85
106.28
105.90
106.34
107.22
107.37
107.31
107.35
106.87
107.59
107.32
107.52
107.35
107.70
107.15
107.45
108.27
108.11
108.16
108.34
108.02
108.52
108.27
108.12
108.08
108.45

-0.412%
0.380%
0.185%
0.160%
0.151%
0.126%
-0.443%
0.512%
-0.242%
0.092%
0.134%
0.267%
-0.225%
0.560%
0.482%
0.265%
0.107%
-0.008%
-0.280%
0.231%
-0.074%
0.132%
0.115%
0.453%
-0.238%
0.468%
0.817%
0.340%
0.057%
0.081%
-0.444%
0.519%
-0.073%
0.234%
0.274%
0.409%
-0.352%
0.409%
0.831%
0.135%
-0.055%
0.040%
-0.443%
0.668%
-0.253%
0.190%
-0.158%
0.325%
-0.513%
0.285%
0.759%
-0.149%
0.055%
0.165%
-0.298%
0.464%
-0.235%
-0.133%
-0.039%
0.338%

0.646%
-0.016%
-0.283%
-0.059%
-0.004%
0.703%
0.415%
-0.177%
0.437%
0.208%
0.201%
-0.215%
0.280%
-0.655%
-0.455%
-0.231%
-0.142%
0.002%
0.462%
-0.077%
0.198%
0.208%
0.122%
-0.046%
0.531%
-0.135%
-0.301%
0.153%
0.328%
-0.049%
0.697%
-0.253%
0.305%
-0.195%
-0.108%
-0.427%
0.606%
-0.201%
-0.566%
0.063%
-0.076%
-0.065%
0.425%
-0.154%
0.748%
0.055%
-0.041%
-0.363%
0.612%
0.266%
-0.977%
-0.009%
0.125%
0.152%
0.468%
-0.385%
0.369%
0.150%
0.147%
-0.098%

USA CPI
Date

CPI

2008-12-01
2009-01-01
2009-02-01
2009-03-01
2009-04-01
2009-05-01
2009-06-01
2009-07-01
2009-08-01
2009-09-01
2009-10-01
2009-11-01
2009-12-01
2010-01-01
2010-02-01
2010-03-01
2010-04-01
2010-05-01
2010-06-01
2010-07-01
2010-08-01
2010-09-01
2010-10-01
2010-11-01
2010-12-01
2011-01-01
2011-02-01
2011-03-01
2011-04-01
2011-05-01
2011-06-01
2011-07-01
2011-08-01
2011-09-01
2011-10-01
2011-11-01
2011-12-01
2012-01-01
2012-02-01
2012-03-01
2012-04-01
2012-05-01
2012-06-01
2012-07-01
2012-08-01
2012-09-01
2012-10-01
2012-11-01
2012-12-01
2013-01-01
2013-02-01
2013-03-01
2013-04-01
2013-05-01
2013-06-01
2013-07-01
2013-08-01
2013-09-01
2013-10-01
2013-11-01
2013-12-01

99.98
100.23
100.60
100.50
100.60
100.75
101.58
101.55
101.89
102.09
102.39
102.74
102.79
102.85
102.75
102.77
102.80
102.77
102.76
102.95
103.11
103.23
103.58
103.83
104.25
104.56
104.90
105.44
105.96
106.37
106.41
106.67
106.95
107.20
107.24
107.42
107.40
107.67
107.89
108.18
108.39
108.25
108.22
108.20
108.75
109.29
109.56
109.34
109.30
109.40
110.00
109.76
109.58
109.78
110.13
110.31
110.40
110.55
110.56
110.68
110.95

France

USD/EUR
Actual(A)
1.3467
1.3355
1.2813
1.3034
1.3205
1.3632
1.4012
1.407
1.4254
1.4548
1.4807
1.4895
1.4603
1.4281
1.368
1.3578
1.3442
1.262
1.2213
1.2756
1.2912
1.303
1.3893
1.3695
1.3213
1.3353
1.3645
1.4001
1.4435
1.434
1.4382
1.4306
1.4342
1.3804
1.37
1.3587
1.3184
1.2893
1.322
1.3212
1.3169
1.284
1.2534
1.2309
1.2384
1.2854
1.2968
1.2827
1.3105
1.3279
1.3382
1.2975
1.3013
1.2983
1.3175
1.3073
1.3318
1.3343
1.3634
1.3494
1.3694

% change in
USD/EUR
Difference
Exchange
Normative(B)
(A-B)
rate
-0.8317
-4.0584
1.7248
1.3120
3.2336
2.7876
0.4139
1.3077
2.0626
1.7803
0.5943
-1.9604
-2.2050
-4.2084
-0.7456
-1.0016
-6.1152
-3.2250
4.4461
1.2230
0.9139
6.6232
-1.4252
-3.5195
1.0596
2.1868
2.6090
3.0998
-0.6581
0.2929
-0.5284
0.2516
-3.7512
-0.7534
-0.8248
-2.9661
-2.2072
2.5363
-0.0605
-0.3255
-2.4983
-2.3832
-1.7951
0.6093
3.7952
0.8869
-1.0873
2.1673
1.3277
0.7757
-3.0414
0.2929
-0.2305
1.4789
-0.7742
1.8741
0.1877
2.1809
-1.0268
1.4821

1.3554
1.3353
1.2777
1.3026
1.3205
1.3728
1.4070
1.4045
1.4316
1.4578
1.4837
1.4863
1.4644
1.4187
1.3618
1.3547
1.3423
1.2620
1.2269
1.2746
1.2938
1.3057
1.3910
1.3689
1.3283
1.3335
1.3604
1.4022
1.4482
1.4333
1.4482
1.4270
1.4386
1.3777
1.3685
1.3529
1.3264
1.2867
1.3145
1.3220
1.3159
1.2832
1.2587
1.2290
1.2477
1.2861
1.2963
1.2780
1.3185
1.3314
1.3251
1.2974
1.3029
1.3003
1.3237
1.3023
1.3367
1.3363
1.3654
1.3481

-0.0199
-0.0540
0.0257
0.0179
0.0427
0.0284
0.0000
0.0209
0.0232
0.0229
0.0058
-0.0260
-0.0363
-0.0507
-0.0040
-0.0105
-0.0803
-0.0407
0.0487
0.0166
0.0092
0.0836
-0.0215
-0.0476
0.0070
0.0310
0.0397
0.0413
-0.0142
0.0049
-0.0176
0.0072
-0.0582
-0.0077
-0.0098
-0.0345
-0.0371
0.0353
0.0067
-0.0051
-0.0319
-0.0298
-0.0278
0.0094
0.0377
0.0107
-0.0136
0.0325
0.0094
0.0068
-0.0276
0.0039
-0.0046
0.0172
-0.0164
0.0295
-0.0024
0.0271
-0.0160
0.0213

REGRESSION OUTPUT
Regression Statistics
Multiple R
0.24681804
R Square
0.060919145
Adjusted R
Square
0.044728096
Standard Error
2.301351258
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
Inflation rate
differential

1
58
59

SS
19.92712415
307.1806214
327.1077456

MS
19.92712415
5.296217611

F
3.762519899

Significance
F
0.05728177

P-value

Lower 95%

Coefficients
0.035095649

Standard
Error

t Stat

0.300724459

0.116703674

0.907498049

163.2293322

84.15090697

1.939721604

0.05728177

0.637061056
5.217009578

Upper 95%
0.566869758
331.675674

Y=-0.035+163.22(Interest rate differential).

The coefficient of determination R2= 0.0609 which means that 6.09% of the variation in the exchange
rate is explained by the variation in inflation differential. F-statistic=3.762 which is much lesser than
critical value of 4.0 so the null hypothesis that coefficients =0 cannot be rejected.
The intercept is statistically insignificant since the t-statistic is 0.1167 which is lesser than the critical
value 2.0 and the P-value is greater than 0.05 and implies that we cannot reject the fact that the
coefficient will be equal to zero. The t-statistic for inflation rate differential is 1.939 which is less than
the critical value 2.0 and the P-value is 0.05. So we fail to reject the null hypothesis that the coefficient
of inflation rate differential is 0. Looking at these values we can say that they are statistically
insignificant and the model is not fitting the data.

For USA and Sweden

Date

CPI

CPI

Inflation
Rate
differentia

2008-12-01
2009-01-01
2009-02-01
2009-03-01
2009-04-01
2009-05-01
2009-06-01
2009-07-01
2009-08-01
2009-09-01
2009-10-01
2009-11-01
2009-12-01
2010-01-01
2010-02-01
2010-03-01
2010-04-01
2010-05-01
2010-06-01
2010-07-01
2010-08-01
2010-09-01
2010-10-01
2010-11-01
2010-12-01
2011-01-01
2011-02-01
2011-03-01
2011-04-01
2011-05-01
2011-06-01
2011-07-01
2011-08-01
2011-09-01
2011-10-01
2011-11-01
2011-12-01
2012-01-01
2012-02-01
2012-03-01
2012-04-01
2012-05-01
2012-06-01
2012-07-01
2012-08-01
2012-09-01
2012-10-01
2012-11-01
2012-12-01
2013-01-01
2013-02-01
2013-03-01
2013-04-01
2013-05-01
2013-06-01
2013-07-01
2013-08-01
2013-09-01
2013-10-01
2013-11-01
2013-12-01

99.98
100.23
100.60
100.50
100.60
100.75
101.58
101.55
101.89
102.09
102.39
102.74
102.79
102.85
102.75
102.77
102.80
102.77
102.76
102.95
103.11
103.23
103.58
103.83
104.25
104.56
104.90
105.44
105.96
106.37
106.41
106.67
106.95
107.20
107.24
107.42
107.40
107.67
107.89
108.18
108.39
108.25
108.22
108.20
108.75
109.29
109.56
109.34
109.30
109.40
110.00
109.76
109.58
109.78
110.13
110.31
110.40
110.55
110.56
110.68
110.95

0.231%
0.364%
-0.099%
0.101%
0.147%
0.830%
-0.030%
0.335%
0.193%
0.300%
0.335%
0.052%
0.055%
-0.099%
0.025%
0.033%
-0.035%
-0.006%
0.180%
0.154%
0.123%
0.340%
0.237%
0.407%
0.293%
0.332%
0.513%
0.494%
0.385%
0.032%
0.250%
0.264%
0.232%
0.038%
0.165%
-0.019%
0.252%
0.207%
0.260%
0.198%
-0.131%
-0.026%
-0.020%
0.513%
0.493%
0.245%
-0.199%
-0.039%
0.096%
0.552%
-0.225%
-0.159%
0.180%
0.317%
0.168%
0.078%
0.133%
0.017%
0.107%
0.240%

100.90
100.53
100.55
100.84
100.99
100.73
100.98
100.51
100.72
101.03
101.28
101.26
101.48
100.84
101.45
101.69
101.70
101.89
101.91
101.60
101.60
102.46
102.79
103.13
103.85
103.32
103.95
104.65
105.10
105.30
105.05
105.00
105.03
105.77
105.77
106.02
106.23
105.24
105.94
106.24
106.47
106.38
106.12
105.71
105.81
106.24
106.17
105.91
106.17
105.29
105.76
106.19
105.98
106.15
105.96
105.81
105.91
106.32
106.10
106.03
106.32

-0.371%
0.023%
0.285%
0.154%
-0.257%
0.241%
-0.461%
0.208%
0.308%
0.251%
-0.023%
0.220%
-0.632%
0.602%
0.240%
0.013%
0.186%
0.017%
-0.308%
0.007%
0.844%
0.319%
0.332%
0.704%
-0.517%
0.611%
0.679%
0.429%
0.186%
-0.237%
-0.048%
0.032%
0.700%
0.003%
0.236%
0.197%
-0.931%
0.664%
0.280%
0.219%
-0.082%
-0.247%
-0.388%
0.102%
0.402%
-0.070%
-0.245%
0.252%
-0.830%
0.446%
0.402%
-0.197%
0.162%
-0.175%
-0.140%
0.092%
0.386%
-0.206%
-0.064%
0.267%

0.604%
0.341%
-0.383%
-0.053%
0.405%
0.587%
0.433%
0.126%
-0.115%
0.050%
0.358%
-0.168%
0.691%
-0.697%
-0.214%
0.019%
-0.221%
-0.023%
0.490%
0.147%
-0.714%
0.021%
-0.094%
-0.295%
0.813%
-0.277%
-0.164%
0.065%
0.198%
0.270%
0.299%
0.232%
-0.465%
0.035%
-0.071%
-0.216%
1.194%
-0.453%
-0.020%
-0.022%
-0.049%
0.222%
0.369%
0.410%
0.091%
0.315%
0.045%
-0.290%
0.933%
0.106%
-0.625%
0.039%
0.018%
0.493%
0.309%
-0.015%
-0.252%
0.223%
0.171%
-0.028%

USA CPI

Sweden

USD/SEK
Actual(A)
0.1246
0.1241
0.1178
0.1164
0.1214
0.1287
0.1288
0.1295
0.1397
0.1427
0.1437
0.1442
0.1401
0.1398
0.1373
0.1397
0.1389
0.1304
0.1275
0.1342
0.1369
0.1411
0.1498
0.1468
0.1457
0.1495
0.1551
0.1574
0.161
0.1599
0.1581
0.1567
0.1562
0.1513
0.1501
0.1487
0.1461
0.1456
0.1499
0.1486
0.1486
0.1427
0.141
0.1436
0.1497
0.1515
0.1505
0.149
0.1513
0.1539
0.157
0.1552
0.1541
0.1514
0.1518
0.1509
0.153
0.1536
0.1559
0.152
0.1527

% change in
USD/SEK
Exchange
Normative(B)
rate
-0.4013
-5.0766
-1.1885
4.2955
6.0132
0.0777
0.5435
7.8764
2.1475
0.7008
0.3479
-2.8433
-0.2141
-1.7883
1.7480
-0.5727
-6.1195
-2.2239
5.2549
2.0119
3.0679
6.1658
-2.0027
-0.7493
2.6081
3.7458
1.4829
2.2872
-0.6832
-1.1257
-0.8855
-0.3191
-3.1370
-0.7931
-0.9327
-1.7485
-0.3422
2.9533
-0.8672
0.0000
-3.9704
-1.1913
1.8440
4.2479
1.2024
-0.6601
-0.9967
1.5436
1.7184
2.0143
-1.1465
-0.7088
-1.7521
0.2642
-0.5929
1.3917
0.3922
1.4974
-2.5016
0.4605

0.1254
0.1245
0.1173
0.1163
0.1219
0.1295
0.1294
0.1297
0.1395
0.1428
0.1442
0.1440
0.1411
0.1388
0.1370
0.1397
0.1386
0.1304
0.1281
0.1344
0.1359
0.1411
0.1497
0.1464
0.1469
0.1491
0.1548
0.1575
0.1613
0.1603
0.1586
0.1571
0.1555
0.1514
0.1500
0.1484
0.1478
0.1449
0.1499
0.1486
0.1485
0.1430
0.1415
0.1442
0.1498
0.1520
0.1506
0.1486
0.1527
0.1541
0.1560
0.1553
0.1541
0.1521
0.1523
0.1509
0.1526
0.1539
0.1562
0.1520

Difference
(A-B)

-0.0013
-0.0067
-0.0009
0.0051
0.0068
-0.0007
0.0001
0.0100
0.0032
0.0009
0.0000
-0.0039
-0.0013
-0.0015
0.0027
-0.0008
-0.0082
-0.0029
0.0061
0.0025
0.0052
0.0087
-0.0029
-0.0007
0.0026
0.0060
0.0026
0.0035
-0.0014
-0.0022
-0.0019
-0.0009
-0.0042
-0.0013
-0.0013
-0.0023
-0.0022
0.0050
-0.0013
0.0000
-0.0058
-0.0020
0.0021
0.0055
0.0017
-0.0015
-0.0016
0.0027
0.0012
0.0029
-0.0008
-0.0012
-0.0027
-0.0003
-0.0014
0.0021
0.0010
0.0020
-0.0042
0.0007

REGRESSION OUTPUT
Regression Statistics
0.13990923
Multiple R
3
0.01957459
R Square
3
Adjusted R
0.00267070
Square
7
2.61270499
Standard Error
2
Observations
60
ANOVA
df
Regression
Residual
Total

SS
1

7.904728145

58
59

395.9211879
403.825916

Coefficients

Standard
Error

MS
7.90472814
5
6.82622737
7

F
1.15799
4

Significance
F
0.28633794
3

t Stat

P-value

Lower 95%

Intercept

0.28781729
6

0.346428607

0.83081272
6

0.40948
7

Inflation rate
differential

98.0357487
3

91.10272676

1.07610114
7

0.28633
8

0.40563490
4
84.3261722
9

Upper 95%
0.98126949
6
280.397669
7

Y=0.287+98.03(Interest rate differential).

The coefficient of determination R2= 0.019 which means that 1.9% of the variation in the exchange rate
is explained by the variation in inflation differential. F-statistic=1.157 which is much lesser than critical
value of 4.0 so the null hypothesis that coefficients =0 cannot be rejected.
The intercept is statistically insignificant since the t-statistic is 0.830 which is lesser than the critical
value 2.0 and the P-value is greater than 0.05 and implies that we cannot reject the fact that the
coefficient will be equal to zero. The t-statistic for inflation rate differential is 1.076 which is less than
the critical value 2.0 and the P-value is 0.286 which is greater than the critical value 0.05. So we fail to

reject the null hypothesis that the coefficient of inflation rate differential is 0. Looking at these values
we can say that they are statistically insignificant and the model is not fitting the data.

For USA and South Africa

USA CPI

South Africa

Date

CPI

CPI

Inflation
Rate
differential

2008-12-01
2009-01-01
2009-02-01
2009-03-01
2009-04-01
2009-05-01
2009-06-01
2009-07-01
2009-08-01
2009-09-01
2009-10-01
2009-11-01
2009-12-01
2010-01-01
2010-02-01
2010-03-01
2010-04-01
2010-05-01
2010-06-01
2010-07-01
2010-08-01
2010-09-01
2010-10-01
2010-11-01
2010-12-01
2011-01-01
2011-02-01
2011-03-01
2011-04-01
2011-05-01
2011-06-01
2011-07-01
2011-08-01
2011-09-01
2011-10-01
2011-11-01
2011-12-01
2012-01-01
2012-02-01
2012-03-01
2012-04-01
2012-05-01
2012-06-01
2012-07-01
2012-08-01
2012-09-01
2012-10-01
2012-11-01
2012-12-01
2013-01-01
2013-02-01
2013-03-01
2013-04-01
2013-05-01
2013-06-01
2013-07-01
2013-08-01
2013-09-01
2013-10-01
2013-11-01
2013-12-01

99.98
100.23
100.60
100.50
100.60
100.75
101.58
101.55
101.89
102.09
102.39
102.74
102.79
102.85
102.75
102.77
102.80
102.77
102.76
102.95
103.11
103.23
103.58
103.83
104.25
104.56
104.90
105.44
105.96
106.37
106.41
106.67
106.95
107.20
107.24
107.42
107.40
107.67
107.89
108.18
108.39
108.25
108.22
108.20
108.75
109.29
109.56
109.34
109.30
109.40
110.00
109.76
109.58
109.78
110.13
110.31
110.40
110.55
110.56
110.68
110.95

0.231%
0.364%
-0.099%
0.101%
0.147%
0.830%
-0.030%
0.335%
0.193%
0.300%
0.335%
0.052%
0.055%
-0.099%
0.025%
0.033%
-0.035%
-0.006%
0.180%
0.154%
0.123%
0.340%
0.237%
0.407%
0.293%
0.332%
0.513%
0.494%
0.385%
0.032%
0.250%
0.264%
0.232%
0.038%
0.165%
-0.019%
0.252%
0.207%
0.260%
0.198%
-0.131%
-0.026%
-0.020%
0.513%
0.493%
0.245%
-0.199%
-0.039%
0.096%
0.552%
-0.225%
-0.159%
0.180%
0.317%
0.168%
0.078%
0.133%
0.017%
0.107%
0.240%

109.35
109.89
110.97
112.58
113.12
113.53
113.80
115.01
115.28
115.68
115.68
115.68
115.95
116.36
117.03
117.98
118.11
118.38
118.38
119.06
119.19
119.32
119.59
119.73
119.86
120.54
121.21
122.70
123.10
123.77
124.45
125.39
125.53
126.07
127.01
127.14
127.55
128.22
128.90
130.25
130.79
130.92
131.32
131.59
132.00
133.08
134.02
134.43
134.83
135.23
136.45
138.07
138.47
138.07
138.61
139.95
140.49
141.17
141.44
141.57
141.98

0.493%
0.982%
1.458%
0.479%
0.358%
0.238%
1.066%
0.234%
0.351%
0.000%
0.000%
0.233%
0.349%
0.579%
0.806%
0.114%
0.228%
0.000%
0.569%
0.113%
0.113%
0.226%
0.113%
0.113%
0.562%
0.559%
1.224%
0.330%
0.548%
0.545%
0.758%
0.108%
0.430%
0.749%
0.106%
0.318%
0.529%
0.526%
1.046%
0.414%
0.103%
0.309%
0.205%
0.307%
0.817%
0.709%
0.302%
0.301%
0.300%
0.897%
1.186%
0.293%
-0.292%
0.391%
0.973%
0.385%
0.480%
0.191%
0.095%
0.286%

-0.261%
-0.611%
-1.534%
-0.377%
-0.210%
0.591%
-1.085%
0.100%
-0.157%
0.300%
0.335%
-0.181%
-0.293%
-0.674%
-0.775%
-0.082%
-0.263%
-0.006%
-0.387%
0.041%
0.010%
0.114%
0.125%
0.294%
-0.268%
-0.226%
-0.702%
0.164%
-0.162%
-0.510%
-0.504%
0.157%
-0.197%
-0.705%
0.059%
-0.336%
-0.275%
-0.317%
-0.778%
-0.216%
-0.234%
-0.334%
-0.225%
0.205%
-0.321%
-0.461%
-0.500%
-0.339%
-0.203%
-0.342%
-1.395%
-0.450%
0.473%
-0.073%
-0.797%
-0.307%
-0.345%
-0.174%
0.012%
-0.046%

REGRESSION OUTPUT

USD/ZAR
Actual(A)
0.1000
0.1014
0.1000
0.1001
0.1106
0.1191
0.1239
0.1253
0.1258
0.1327
0.1336
0.1323
0.1331
0.1338
0.1299
0.1343
0.1359
0.1308
0.1304
0.1319
0.1367
0.1395
0.1442
0.1431
0.1457
0.1446
0.1387
0.1442
0.1483
0.1457
0.1468
0.147
0.141
0.1333
0.1253
0.1228
0.1218
0.1243
0.1302
0.1314
0.1274
0.1229
0.1188
0.1212
0.1211
0.1207
0.1155
0.1136
0.1156
0.1141
0.1125
0.109
0.1097
0.1077
0.0997
0.1006
0.0995
0.1
0.1009
0.098
0.0965

% change in
USD/ZAR
Exchange
Normative(B)
rate
1.4000
-1.3807
0.1000
10.4895
7.6854
4.0302
1.1299
0.3990
5.4849
0.6782
-0.9731
0.6047
0.5259
-2.9148
3.3872
1.1914
-3.7528
-0.3058
1.1503
3.6391
2.0483
3.3692
-0.7628
1.8169
-0.7550
-4.0802
3.9654
2.8433
-1.7532
0.7550
0.1362
-4.0816
-5.4610
-6.0015
-1.9952
-0.8143
2.0525
4.7466
0.9217
-3.0441
-3.5322
-3.3360
2.0202
-0.0825
-0.3303
-4.3082
-1.6450
1.7606
-1.2976
-1.4023
-3.1111
0.6422
-1.8232
-7.4280
0.9027
-1.0934
0.5025
0.9000
-2.8741
-1.5306

0.0997
0.1008
0.0985
0.0997
0.1104
0.1198
0.1226
0.1254
0.1256
0.1331
0.1340
0.1321
0.1327
0.1329
0.1289
0.1342
0.1355
0.1308
0.1299
0.1320
0.1367
0.1397
0.1444
0.1435
0.1453
0.1443
0.1377
0.1444
0.1481
0.1450
0.1461
0.1472
0.1407
0.1324
0.1254
0.1224
0.1215
0.1239
0.1292
0.1311
0.1271
0.1225
0.1185
0.1214
0.1207
0.1201
0.1149
0.1132
0.1154
0.1137
0.1109
0.1085
0.1102
0.1076
0.0989
0.1003
0.0992
0.0998
0.1009
0.0980

Difference
(A-B)

0.0017
-0.0008
0.0016
0.0109
0.0087
0.0041
0.0027
0.0004
0.0071
0.0005
-0.0017
0.0010
0.0011
-0.0030
0.0054
0.0017
-0.0047
-0.0004
0.0020
0.0047
0.0028
0.0045
-0.0013
0.0022
-0.0007
-0.0056
0.0065
0.0039
-0.0024
0.0018
0.0009
-0.0062
-0.0074
-0.0071
-0.0026
-0.0006
0.0028
0.0063
0.0022
-0.0037
-0.0042
-0.0037
0.0027
-0.0003
0.0000
-0.0046
-0.0013
0.0024
-0.0013
-0.0012
-0.0019
0.0012
-0.0025
-0.0079
0.0017
-0.0008
0.0008
0.0011
-0.0029
-0.0015

Regression Statistics
Multiple R
0.057178089
R Square
0.003269334
Adjusted R
Square
0.013915678
Standard Error
3.208713031
Observations
60
ANOVA
df
Regression
Residual
Total

1
58
59

Coefficients
Intercept
inflation rate
differential

SS
1.958714784
597.1586804
599.1173952
Standard
Error

MS
1.958714784
10.29583932

F
0.190243333

Significance
F
0.66433343

t Stat

P-value

Lower 95%

Upper 95%
1.10661672
257.6698321

0.110437364

0.497662315

0.22191225

0.825161712

0.885741992

46.10041452

105.6939449

0.436168927

0.66433343

-165.469003

Y=0.110+46.100(Interest rate differential).

The coefficient of determination R2= 0.0032 which means that only 0.32% of the variation in the
exchange rate is explained by the variation in inflation differential. F-statistic=0.190 which is much lesser
than critical value of 4.0 so the null hypothesis that coefficients =0 cannot be rejected.
The intercept is statistically insignificant since the t-statistic is 0.221 which is lesser than the critical
value 2.0 and the P-value is greater than 0.05 and implies that we cannot reject the fact that the
coefficient will be equal to zero. The t-statistic for inflation rate differential is 0.436 which is less than
the critical value 2.0 and the P-value is 0.664 which is greater than the critical value 0.05. So we fail to
reject the null hypothesis that the coefficient of inflation rate differential is 0. Looking at these values
we can say that they are statistically insignificant and the model is not fitting the data.

For USA and Poland

USA CPI

Poland

Date

CPI

CPI

2008-12-01
2009-01-01
2009-02-01
2009-03-01
2009-04-01
2009-05-01
2009-06-01
2009-07-01
2009-08-01
2009-09-01
2009-10-01
2009-11-01
2009-12-01
2010-01-01
2010-02-01
2010-03-01
2010-04-01
2010-05-01
2010-06-01
2010-07-01
2010-08-01
2010-09-01
2010-10-01
2010-11-01
2010-12-01
2011-01-01
2011-02-01
2011-03-01
2011-04-01
2011-05-01
2011-06-01
2011-07-01
2011-08-01
2011-09-01
2011-10-01
2011-11-01
2011-12-01
2012-01-01
2012-02-01
2012-03-01
2012-04-01
2012-05-01
2012-06-01
2012-07-01
2012-08-01
2012-09-01
2012-10-01
2012-11-01
2012-12-01
2013-01-01
2013-02-01
2013-03-01
2013-04-01
2013-05-01
2013-06-01
2013-07-01
2013-08-01
2013-09-01
2013-10-01
2013-11-01
2013-12-01

99.98
100.23
100.60
100.50
100.60
100.75
101.58
101.55
101.89
102.09
102.39
102.74
102.79
102.85
102.75
102.77
102.80
102.77
102.76
102.95
103.11
103.23
103.58
103.83
104.25
104.56
104.90
105.44
105.96
106.37
106.41
106.67
106.95
107.20
107.24
107.42
107.40
107.67
107.89
108.18
108.39
108.25
108.22
108.20
108.75
109.29
109.56
109.34
109.30
109.40
110.00
109.76
109.58
109.78
110.13
110.31
110.40
110.55
110.56
110.68
110.95

0.231%
0.364%
-0.099%
0.101%
0.147%
0.830%
-0.030%
0.335%
0.193%
0.300%
0.335%
0.052%
0.055%
-0.099%
0.025%
0.033%
-0.035%
-0.006%
0.180%
0.154%
0.123%
0.340%
0.237%
0.407%
0.293%
0.332%
0.513%
0.494%
0.385%
0.032%
0.250%
0.264%
0.232%
0.038%
0.165%
-0.019%
0.252%
0.207%
0.260%
0.198%
-0.131%
-0.026%
-0.020%
0.513%
0.493%
0.245%
-0.199%
-0.039%
0.096%
0.552%
-0.225%
-0.159%
0.180%
0.317%
0.168%
0.078%
0.133%
0.017%
0.107%
0.240%

103.2
103.6
104.6
105.4
106.1
106.7
106.9
107.0
106.6
106.6
106.7
107.0
107.0
107.7
107.9
108.1
108.6
108.9
109.2
109.0
108.5
109.2
109.8
109.9
110.4
111.7
111.9
112.9
113.5
114.2
113.7
113.3
113.3
113.4
114.2
115.0
115.4
116.2
116.7
117.3
117.9
118.1
118.3
117.7
117.4
117.4
117.9
118.0
118.1
118.2
118.2
118.4
118.9
118.8
118.8
119.2
118.8
118.9
119.1
118.9
119.0

0.43%
0.93%
0.73%
0.73%
0.54%
0.18%
0.09%
-0.36%
0.00%
0.09%
0.27%
0.00%
0.63%
0.18%
0.27%
0.44%
0.26%
0.26%
-0.18%
-0.44%
0.62%
0.53%
0.09%
0.44%
1.22%
0.17%
0.94%
0.51%
0.59%
-0.42%
-0.34%
0.00%
0.08%
0.68%
0.67%
0.42%
0.66%
0.41%
0.49%
0.57%
0.16%
0.16%
-0.49%
-0.33%
0.08%
0.41%
0.08%
0.08%
0.08%
0.00%
0.16%
0.40%
-0.08%
0.00%
0.32%
-0.32%
0.08%
0.16%
-0.16%
0.08%

REGRESSION OUTPUT

Inflation
Rate
differential
-0.198%
-0.556%
-0.826%
-0.623%
-0.393%
0.649%
-0.119%
0.696%
0.193%
0.210%
0.065%
0.052%
-0.569%
-0.276%
-0.241%
-0.409%
-0.299%
-0.270%
0.357%
0.596%
-0.492%
-0.185%
0.150%
-0.029%
-0.913%
0.160%
-0.425%
-0.015%
-0.205%
0.454%
0.589%
0.264%
0.147%
-0.634%
-0.503%
-0.434%
-0.409%
-0.204%
-0.231%
-0.373%
-0.293%
-0.188%
0.468%
0.841%
0.411%
-0.163%
-0.281%
-0.121%
0.015%
0.552%
-0.387%
-0.561%
0.261%
0.317%
-0.154%
0.401%
0.052%
-0.144%
0.269%
0.159%

USD/PLN
Actual(A)
0.3277
0.3218
0.3250
0.3147
0.3144
0.3052
0.3070
0.3109
0.3141
0.3120
0.3207
0.3209
0.3196
0.3098
0.3152
0.3107
0.3026
0.2930
0.2904
0.2995
0.3152
0.3193
0.3155
0.2939
0.2937
0.3068
0.3138
0.3202
0.3478
0.3586
0.3625
0.3637
0.3633
0.3486
0.3471
0.3420
0.3304
0.3464
0.3509
0.3290
0.3229
0.3112
0.2976
0.3113
0.3468
0.3483
0.3395
0.3501
0.3519
0.3570
0.3507
0.3499
0.3448
0.3259
0.3104
0.3076
0.2971
0.2816
0.2759
0.3159
0.3359

% change in
USD/PLN
Difference
Exchange
Normative(B)
(A-B)
rate
-1.8004
0.9944
-3.1692
-0.0953
-2.9262
0.5898
1.2704
1.0293
-0.6686
2.7885
0.0624
-0.4051
-3.0663
1.7431
-1.4277
-2.6070
-3.1725
-0.8874
3.1336
5.2421
1.3008
-1.1901
-6.8463
-0.0681
4.4603
2.2816
2.0395
8.6196
3.1052
1.0876
0.3310
-0.1100
-4.0462
-0.4303
-1.4693
-3.3918
4.8426
1.2991
-6.2411
-1.8541
-3.6234
-4.3702
4.6035
11.4038
0.4325
-2.5266
3.1222
0.5141
1.4493
-1.7647
-0.2281
-1.4576
-5.4814
-4.7561
-0.9021
-3.4135
-5.2171
-2.0241
14.4980
6.3311

0.3271
0.3200
0.3223
0.3127
0.3132
0.3072
0.3066
0.3131
0.3147
0.3127
0.3209
0.3211
0.3178
0.3089
0.3144
0.3094
0.3017
0.2922
0.2914
0.3013
0.3136
0.3187
0.3160
0.2938
0.2910
0.3073
0.3125
0.3202
0.3471
0.3602
0.3646
0.3647
0.3638
0.3464
0.3454
0.3405
0.3290
0.3457
0.3501
0.3278
0.3220
0.3106
0.2990
0.3139
0.3482
0.3477
0.3385
0.3497
0.3520
0.3590
0.3493
0.3479
0.3457
0.3269
0.3099
0.3088
0.2973
0.2812
0.2766
0.3164

-0.0053
0.0050
-0.0076
0.0017
-0.0080
-0.0002
0.0043
0.0010
-0.0027
0.0080
0.0000
-0.0015
-0.0080
0.0063
-0.0037
-0.0068
-0.0087
-0.0018
0.0081
0.0139
0.0057
-0.0032
-0.0221
-0.0001
0.0158
0.0065
0.0077
0.0276
0.0115
0.0023
-0.0009
-0.0014
-0.0152
0.0007
-0.0034
-0.0101
0.0174
0.0052
-0.0211
-0.0049
-0.0108
-0.0130
0.0123
0.0329
0.0001
-0.0082
0.0116
0.0022
0.0050
-0.0083
0.0006
-0.0031
-0.0198
-0.0165
-0.0023
-0.0117
-0.0157
-0.0053
0.0393
0.0195

Regression Statistics
Multiple R
0.250375642
R Square
0.062687962
Adjusted R
Square
0.04652741
Standard Error
3.904245642
Observations
60
ANOVA
df
Regression
Residual
Total

1
58
59

Coefficients
Intercept
inflation rate
differential

SS
59.12922926
884.1017737
943.231003
Standard
Error

MS
59.12922926
15.24313403

F
3.879072974

Significance
F
0.053673978

t Stat

P-value

Lower 95%

0.217741497

0.5103858

0.426621385

0.671234493

249.977116

126.9218163

1.969536233

0.053673978

0.803906682
4.084502803

Y=0.217+249.97(Interest rate differential).

The coefficient of determination R2= 0.062 which means that only 6.2% of the variation in the exchange
rate is explained by the variation in inflation differential. F-statistic=3.879 which is much lesser than
critical value of 4.0 so the null hypothesis that coefficients =0 cannot be rejected.
The intercept is statistically insignificant since the t-statistic is 0.426 which is lesser than the critical
value 2.0 and the P-value is greater than 0.05 and implies that we cannot reject the fact that the
coefficient will be equal to zero. The t-statistic for inflation rate differential is 1.969 which is less than
the critical value 2.0 and the P-value is 0.053 which is little greater than the critical value 0.05. So we fail
to reject the null hypothesis that the coefficient of inflation rate differential is 0. Looking at these values
we can say that they are statistically insignificant and the model is not fitting the data.

Conclusion:

The purpose of this analysis is to empirically test the validity of relative purchasing power
parity. Looking at the regression results of the five countries we can say that the values are not
statistically significant to support the theory of relative purchasing power parity. The R2 values
of all country pairs are very low. There may be various reasons for this behavior. Even though
the difference between the calculated and the actual exchange is very less the regression result
does not support the theory. One reason may be that the number of observations taken for the
analysis is limited to sixty. Other reasons are that the short run inflation rates may not predict
the change in exchange rates as it requires some time for the system to incorporate or to take
into effect the new information. Factors like relative competitiveness, government debt and
speculation also affect the exchange rates. Therefore we can conclude that change in inflation
rates between two countries may not alone accurately predict the sport exchange rates.