Write a 14 pages paper on an empirical evaluation of the purchasing power parity. In pursuit of investigating the empirical validity of the PPP theory, this study uses the monthly Japanese Yen to US Dollar exchange rate and the seasonally adjusted Japanese and US monthly Consumer Price Index series as the representative of the price levels as available from OECD main economic indicators 2010. Our data set covers a sample period ranging from 1st January1960 to 1st June 2010. The indexing of CPI for both the Japanese and US series is in accordance with assuming the price level of 2005=100.5.
This section presents the results of the estimations specified in section 2. We start of by presenting the statistical preliminaries and time series plots of the variables to engender a preconception of what can be expected from the estimated equations.
a. Statistical preliminaries
Table 1 presents the summary statistics for the variables of interest. Note that these are expressed in terms of natural logarithms of the levels.Figure 1 below depicts the inter-temporal dynamics of the natural logarithm of the series of Japanese Yen to US Dollar Exchange rates. Observe that the series provides a clear visual evidence of a downward trend implying that over the period of 1970 to 2011, there has been a gradual decline in the exchange rate. Additionally, the series also appears to be non-stationary. Of course stationarity properties can only be conclusively verified after formal conduction of unit root tests. Figure 3 presents the time plots of Japanese and US consumer price indices in logs.