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Determining a forecaster ar model for exchange rate

Assignment:

Problem:

Suppose, a forecaster estimated the following AR (7) model using the monthly exchange rate data from January 1995 to November 2009.

S^*_t= 0.009 + 0.189S^*_t-1 + 0.036S^*_t-3 + 0.007S^*_t-7

1. Using the Box-Jenkins methodology explain the steps that the researcher followed to select and estimate this model for the exchange rate.

2. Explain why is it likely that the researcher used this AR(7) model to forecast the exchange rate (i.e. discuss the pattern of the ACF and PACF graphs.)

3. What is the forecasted exchange rate for December 2009?

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