Quantitative Research: The Basis of a Statistical Model

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Purpose Statement

The purpose of this quantitative research paper is to develop the basis of a statistical model that can predict the relationship between the dependent variable US Currency Exchange Rate against British Pound and three independent variables including US-UK Monthly Trade Balance, US Monthly Inflation Rate, and US Monthly Discount Rate. Therefore, the correlation between variables can be stated as the dependent variable US Currency Exchange Rate against British Pound and is determined by independent variables including US-UK Monthly Trade Balance, US Monthly Inflation Rate, and US Monthly Discount Rate.

The most important relationship is between US Currency Exchange Rate against British Pound and US-UK Monthly Trade Balance because both countries are major trade partners and the trade balance between both countries has direct implications for the level of the cross-currency exchange rate. Although, other variables also have a direct impact on the exchange rate levels, however, for the specific study of the cross-currency exchange rate the US-UK Monthly Trade Balance can be considered as the primary independent variable.

Definitions of Variables

US Currency Exchange Rate against British Pound

In simple terms, it is the price of US Dollars in terms of the British Pound. The dependent variable identified for this report can therefore be defined as the value of US Dollars that can be bought with one British Pound.

US-UK Monthly Trade Balance

This is the net amount of the exports and imports of the US to the UK. This is obtained by deducting the value of imports from exports (Koo and Kennedy). If a country has a trade deficit with its trading partners then it implies that it has to borrow to make payments in foreign currency. The demand for foreign currency will have a negative impact on the value of local currency until the balance of payments is achieved (Karl)

US Monthly Inflation Rate

A high level of inflation rate in the country hurts the exchange rate of the local currency and vice versa. This is due to the reason that rising inflation leads to currency losing its value as more local currency is required to make payments for the same level of goods and services (Dornbusch).

US Monthly Discount Rate

The interest rates prevailing in the economy have a direct relationship with the currency exchange rate. The Federal Reserve can adjust the level of interest rate to attract more investment into securities from other countries. This would create a demand for US Dollars and thus, push its value upwards and vice versa.

Data Description

	USD:GBP Exchange Rate	Trade Balance	Inflation	Discount Rate
2007 Jan	1.9580	-441.1	0.0269	6.25
2007 Feb	1.9579	212.4	0.0269	6.25
2007 Mar	1.9471	427.8	0.0236	6.25
2007 Apr	1.9858	-420.1	0.0197	6.25
2007 May	1.9845	-408.4	0.0276	6.25
2007 Jun	1.9848	-584.3	0.0354	6.25
2007 Jul	2.0317	-1,323.80	0.0431	6.25
2007 Aug	2.0121	-897.6	0.0408	6.01
2007 Sep	2.0188	-550.7	0.0285	5.53
2007 Oct	2.0434	-1,240.00	0.0428	5.24
2007 Nov	2.0727	-1,158.80	0.0403	5
2007 Dec	2.0194	-491.4	0.0398	4.83
2008 Jan	1.9694	126.7	0.0394	4.48
2008 Feb	1.9628	-72.5	0.0418	3.5
2008 Mar	2.0007	-21.1	0.0502	3.04
2008 Apr	1.9829	-142.8	0.056	2.49
2008 May	1.9658	-765.8	0.0537	2.25
2008 Jun	1.9675	-170.2	0.0494	2.25
2008 Jul	1.9896	-846.90	0.0366	2.25
2008 Aug	1.8944	-569.2	0.0107	2.25
2008 Sep	1.8028	-809.4	0.0009	2.25
2008 Oct	1.7002	-823.90	0.0385	1.81
2008 Nov	1.5366	-558.80	0.0003	1.25
2008 Dec	1.4885	-334.4	0.0024	0.86
2009 Jan	1.4493	604.1	-0.0038	0.5
2009 Feb	1.4443	-306.8	-0.0074	0.5
2009 Mar	1.4204	797.2	-0.0128	0.5
2009 Apr	1.4696	-286.4	-0.0143	0.5
2009 May	1.5392	-129.5	-0.021	0.5
2009 Jun	1.6352	447.4	-0.0148	0.5
2009 Jul	1.6358	-369.40	-0.0129	0.5
2009 Aug	1.6551	-743.4	-0.0018	0.5
2009 Sep	1.6330	-503.3	0.0184	0.5
2009 Oct	1.6162	-459.80	0.0272	0.5
2009 Nov	1.6588	-566.20	-0.0034	0.5
2009 Dec	1.6236	-260.3	0.0263	0.5
2010 Jan	1.6153	624.7	0.0214	0.5
2010 Feb	1.5626	-343.7	0.0231	0.59
2010 Mar	1.5058	410.6	0.0224	0.75
2010 Apr	1.5324	-22	0.0202	0.75
2010 May	1.4704	108.3	0.0105	0.75
2010 Jun	1.4729	-365.2	0.0124	0.75
2010 Jul	1.5266	-360.60	0.0115	0.75
2010 Aug	1.5667	-619.3	0.0114	0.75
2010 Sep	1.5555	-228	1%	0.75
2010 Oct	1.5861	56.50	1.14%	0.75
2010 Nov	1.5986	-311.00	1.50%	0.75
2010 Dec	1.5609	-311.8	1.64%	0.75
2011 Jan	1.5757	538.4	1.63%	0.75
2011 Feb	1.6118	164.4	2.11%	0.75
2011 Mar	1.6164	645.3	0.0268	0.75
2011 Apr	1.6349	697.2	0.0316	0.75
2011 May	1.6359	77.6	0.0357	0.75
2011 Jun	1.6231	616.3	0.0356	0.75

Source: (Federal Reserve; InflationData.com; OANDA; US Census Bureau).

The data of both dependent and independent variables is presented in the above table for period from January 2007 to June 2011. The data has been obtained from different reliable sources such as Federal Reserve Bank and US Census Bureau website and other database portals.

Works Cited

Dornbusch, Rüdiger. Exchange rates and inflation. Massacheusts: MIT Press, 1996.

Federal Reserve. Selected Interest Rates (Daily) H.15. 2011. Web.

InflationData.com. Historical Inflation. 2011. Web.

Karl, Case E. Principles Of Economics. New Dehli: Pearson Education India, 2007.

Koo, Won W. and P. Lynn Kennedy. International trade and agriculture. New Yoirk: John Wiley and Sons, 2005.

OANDA. Average Exchange Rates. 2011. Web.

US Census Bureau. Trade in Goods with United Kingdom. 2011. Web.

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