ABC develops a regression model to forecast the movement in the Yen because a substantial portion of its business involves inflows and outflows in Yen. The estimated model for the percentage change in the Yen (et) is given as follows:
et = 0.004 - 0.8 lxfNTt + 0.6 INFt-1 + u where INT = Relative interest rate INF = Relative inflation rate
(a) Explain the appropriateness or otherwise of the sign of the coefficients of the explanatory variables in the estimated model.
(b)Briefly discuss the observed impact of the interest rate variable.
(c)Suppose a probability distribution was estimated for INF as follows:
Outcome -3% - 4% - 5%
Probability 10% 55% 35%
Determine the expected percentage change in the value of the Yen, [E (et)], given that INFt-1 is 2%.
