Estimating The Exchange Rate of the Canadian Dollar .
This paper examines the estimates of equation the exchange rate of the Canadian dollar, from the quarterly time series for the period 1970:1-2000:4 gathered from the International Monetary Fund database. .
Since Canada is a small open economy, it can present some idealized results. The empirical results provide support for a negative correlation between real output growth and the interest rate, a long with real exchange rates. Any changes in the real interest and real exchange rate depends on the American economy, therefore whatever is set by the United States make a great impact on the Canadian economy as well. Empirical results provided support for the purpose of this paper which is estimates the equation for the exchange rate of Canadian Dollar. It predicts that higher growth and higher inflation rate differentials both lead to a depreciating Canadian Dollar value.
This paper is organized as follows: section 2 introduces the model, section 3 estimation, section 4 analyzes the hypothesis testing, and in section 5 presents the results of the estimation and summarizes the findings. .
2. Model.
The estimation is carried out by means of a linear regression using SAS by the following equation:.
Y='Æ'~Æ'y'Æ' 1tÆ'y'Æ'
•X2t+ut,.
where the dependent variable, the quarterly percentage change in the Canadian dollar's exchange rate (Y) is related to quarterly percentage changes in the two independent variables, the U.S and Canada inflation differential (X1) and the U.S. and Canada income growth differential (X2). In our model, 'Æ'~Æ'n is a constant or intercept, 'Æ'áÆ'n captures the effect of the Canadian dollar's exchange value to the changes in inflation between the U.S. and Canada, 'Æ'
• states the effect of the Canadian dollar's exchange value to the changes in the income- growth differential between the U.
