On the Relevance of the Purchasing Power Hypothesis as a Determinant of Exchange Rate Equilibrium in the Post WWI French Franc Floating Exchange Rate Period

Giulio Cifarelli and Paolo Paesani

Working Papers - Economics from Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa

Abstract: The French franc variability of the 1920-1926 time interval is often attributed to irrational speculation. A common view is that French investors, disregarding fundamentals, were prone to export their funds in response to adverse financial/political news, destabilizing in this way the exchange rate. Our analysis, based on a new dataset, qualifies these results. The estimates of a Markov-switching Heterogeneous Agents Model strongly support the hypothesis that informed speculators relied on the relative purchasing power parity paradigm and drove the short run exchange rate dynamics, bandwagon effects being but short lived. In line with previous analyses the impact of additional explanatory variables, real and financial, turns out to be rather limited.

Keywords: Gold Standard; HAM French Franc pricing; Markov Switching (search for similar items in EconPapers)
JEL-codes: C32 F31 F33 G15 N24 (search for similar items in EconPapers)
Pages: 21 pages
Date: 2024
New Economics Papers: this item is included in nep-his, nep-mon and nep-opm
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