Exchange Rate Behavior and Exchange Rate Puzzles: Why the XVIII Century Might Help

Rafael Torres Sánchez (), Javier Gómez Biscarri and Fernando Pérez de Gracia ()
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Rafael Torres Sánchez: School of Economics and Business Administration, University of Navarra

No 12/04, Faculty Working Papers from School of Economics and Business Administration, University of Navarra

Abstract: This article explores the behavior of exchange rates in Spain during the XVIII century. We posit that exchange rates were the result of both government intervention over nominal values of currencies and the estimate that the market of bills of exchange- gave to the value of the currency. We analyze the exchange rates quoted in London on three Spanish cities between 1699 and 1826. After a brief overview of the functioning of the Spanish monetary system and of exchange rate determination, we assess the extent to which the exchange rate responded to market fundamentals by testing some theoretical models of exchange rate determination. The results suggest that purchasing power parity held during the XVIII century, with the exchange rate tracking quite closely the behavior of inflation differentials. Deviations from PPP appeared at the end of the century, due mostly to changes in the real exchange rate caused by the bilateral trade balance between Spain and Great Britain and, maybe, to productivity differentials.

JEL-codes: F31 N13 N23 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2004-09-01
New Economics Papers: this item is included in nep-ifn
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Citations: View citations in EconPapers (1)

Published, Revista de Historia Economica, 2005, vol. 1: pp. 143-174

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