ECON 4040A Individual assignment

Due date: 12th April 2024

Instructions

 Write your answers in a word or pdf document.

 Answer all questions.
 Write your answers preceded by the commands used for each (sub)question.
 Copy and paste any requested visual information.
 Remember to copy and paste all your commands!
 You need to download the accompanying datasets to complete the assignment: Assignment
2.

1
Question 1 (34 Marks)
In this question you need to analyse the trends and drivers of the rand exchange rate. The Reserve
Bank of South Africa notes the importance of keeping South African Rand value stable.

You are given the following monthly data, for the period 2008 to 2020:

Variable names and description:

Rwhole : Wholesale trade sales, constant seasonally adjusted (R millions)
Rand : Real effective exchange rate of the rand: Average for the period (20 trading partners). A
higher index value indicates a stronger (appreciating) rand

In addition you have to create the following variable:

Dum : Dummy variable, where 2020M2-M4 = 1; otherwise = zero (0)

The data for the above variables is available in the STATA file “Assignment2.dta”.

Q.1. Calculate and provide a graph of the change in the following variables for the 8
1 period 2009 to 2020 (use the month on same month of previous year
approach). Briefly discuss the main trends (and possible reasons for the trends)
you observe. Show your formulae.
(a) % change in real wholesale trade sales

(b) % change in the rand exchange rate

Q.1. (i) Complete the table below by conducting stationarity tests. (4) 8
2 Variable Mode Lag ADF test statistic Decisio

τ τ τμ τ n

LRWHOLE Trend and Intercept X X

Intercept X X
None X X
∆LRWHOLE Trend and Intercept
Intercept
None
LRAND Trend and Intercept
Intercept
None
∆LRAND Trend and Intercept
Intercept
None

Statistically significant at the: 10% level (*), 5% level (**), 1% level (***)

(ii) Based on your findings in the table above, comment on the reliability of the
ADF test compared to other tests given the sampling period and COVID 19. (4)
Q.1. 8
In this part you need to build a long run equation and test if there is possible
3
cointegration by using the Engle and Granger method
2
(i) Estimate the following long-run equation:
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