Historical data is compiled for the quarterly percentage change in the pound against the U.S. dollar, the quarterly percentage change in the inflation differential (U.S. inflation rate – U.K. inflation rate) and the quarterly percentage change in the income growth differential (U.S. income growth rate – U.K. growth rate) for several periods
Assume the application of regression analysis generates the following coefficients: bo = .002, b1 = .8, b2 = 1.0.
Assume the most recent quarterly percentage change in the inflation differential is 4% and the quarterly percentage change in the income growth differential is 2%.
BPt = .002 + .8(4%) + 1(2%) = 5.4%