Figure 13.8 shows the time series for two exchange rates-the EURO per \($US\) and the STERLING per \($US\) (data file sterling). Both the levels and the changes in the data are shown.

a. Which set of data would you consider using to estimate a VEC model, and which set to estimate a VAR? Why?

b. Apply the two-step approach suggested in this chapter to estimate a VEC model.

c. Estimate a VAR model paying attention to the order of the lag.

Data From Figure 13.8:-

Transcribed Image Text:

Euro/SUS Sterling/$US 1.2 0.72 0.68 1.1 1.0- 0.9 0.64 0.60 0.56 0.8- 0.52- 0.48 0.7 1999 2000 2001 2002 2003 2004 2005 2006 A(Euro/$US) 1999 2000 2001 2002 2003 2004 2005 2006 A(Sterling/SUS) 0.06. 0.04- 0.04- 0.03- 0.02- 0.02- 0.00 0.01 -0.02 0.00- -0.04 -0.01 -0.06 -0.02 -0.08. -0.03- -0.10+ -0.04 1999 2000 2001 2002 2003 2004 2005 2006 1999 2000 2001 2002 2003 2004 2005 2006 FIGURE 13.8 Exchange rates.