A STUDY OF THE RELATIONSHIP BETWEEN INFLATION RATE AND EXCHANGE RATE

ABSTRACT

In this project, we study the relationship between rate Inflation rate and exchange rate of three international currencies, namely; Dollar, Euro and Pounds. We study the correlation matrix between the Three exchanges rate and found that multicollinearity exist between the Pounds and Euro. We however, make use of the Ordinary Least Squared (OLS) to Estimate the Regression equation and later make use of the Ridge Regression to correct the multicollinearity present in using the OLS.