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International Capital Mobility in History: Purchasing-Power Parity in the Long Run

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Alan M. Taylor

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Abstract

This paper investigates purchasing-power parity (PPP) since the late nineteenth century for a sample of twenty countries, a broader sample of pooled annual data than has been studied before. Econometric results for time-series and panel samples allows us to test the robustness of the PPP hypothesis in different eras: the gold-standard, interwar, Bretton Woods, and the recent float. The evidence for PPP is mixed: Strong PPP, entailing stationarity of the real exchange rate, is not broadly supported, and real-exchange-rate dispersion shows counterintuitive historical patterns. However, not-much-weaker forms of PPP can be supported, with evidence of cointegration between different countries' common-currency price levels. Residual variances here confirm the conventional wisdom that the interwar period, particularly the Great Depression, represented the nadir of international capital market integration in the modern era.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5742.

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Date of creation: Sep 1996
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Handle: RePEc:nbr:nberwo:5742

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Find related papers by JEL classification:
N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative
F30 - International Economics - - International Finance - - - General

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

  1. Diebold, Francis X & Husted, Steven & Rush, Mark, 1991. "Real Exchange Rates under the Gold Standard," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1252-71, December. [Downloadable!] (restricted)
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  2. Alan M. Taylor & Jeffrey G. Williamson, 1994. "Convergence in the Age of Mass Migration," NBER Working Papers 4711, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  3. repec:cup:etheor:v:11:y:1995:i:5:p:984-1014 is not listed on IDEAS
  4. Edison, Hali J. & Gagnon, Joseph E. & Melick, William R., 1997. "Understanding the empirical literature on purchasing power parity: the post-Bretton Woods era," Journal of International Money and Finance, Elsevier, vol. 16(1), pages 1-17, February. [Downloadable!] (restricted)
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  5. Engel, C., 1996. "Long-Run PPP May Not Hold After All," Working Papers 96-05, University of Washington, Department of Economics.
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  6. Kenneth A. Froot & Kenneth Rogoff, 1996. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Hansen, Bruce E., 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Econometric Theory, Cambridge University Press, vol. 11(05), pages 1148-1171, October. [Downloadable!]
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  8. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  9. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, vol. 45(1), pages 157-74, March. [Downloadable!] (restricted)
  10. Williamson Jeffrey G., 1995. "The Evolution of Global Labor Markets since 1830: Background Evidence and Hypotheses," Explorations in Economic History, Elsevier, vol. 32(2), pages 141-196, April. [Downloadable!] (restricted)
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  11. Baumol, William J, 1986. "Productivity Growth, Convergence, and Welfare: What the Long-run Data Show," American Economic Review, American Economic Association, vol. 76(5), pages 1072-85, December. [Downloadable!] (restricted)
  12. Barry Eichengreen., 1990. "Trends and Cycles in Foreign Lending," Economics Working Papers 90-146, University of California at Berkeley. [Downloadable!]
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  13. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March. [Downloadable!] (restricted)
  14. Kremers, Jeroen J M & Ericsson, Neil R & Dolado, Juan J, 1992. "The Power of Cointegration Tests," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 325-48, August.
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  15. Alan M. Taylor, 1996. "International Capital Mobility in History: The Saving-Investment Relationship," NBER Working Papers 5743, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  16. Taylor, Alan M., 1992. "External Dependence, Demographic Burdens, and Argentine Economic Decline After the Belle ?poque," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 907-936, December. [Downloadable!]
  17. repec:cup:etheor:v:11:y:1995:i:5:p:1148-71 is not listed on IDEAS
  18. Frankel, Jeffrey A. & Rose, Andrew K., 1996. "A panel project on purchasing power parity: Mean reversion within and between countries," Journal of International Economics, Elsevier, vol. 40(1-2), pages 209-224, February. [Downloadable!] (restricted)
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  19. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688 Elsevier. [Downloadable!] (restricted)
  20. Jeffrey G. Williamson, 1995. "Globalization, Convergence and History," NBER Working Papers 5259, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  21. Papell, David H., 1997. "Searching for stationarity: Purchasing power parity under the current float," Journal of International Economics, Elsevier, vol. 43(3-4), pages 313-332, November. [Downloadable!] (restricted)
  22. Lothian, James R., 1990. "A century plus of Yen exchange rate behavior," Japan and the World Economy, Elsevier, vol. 2(1), pages 47-70, March. [Downloadable!] (restricted)
  23. O'Rourke, Kevin H & Taylor, Alan M & Williamson, Jeffrey G, 1996. "Factor Price Convergence in the Late Nineteenth Century," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 499-530, August.
  24. Lothian, James R & Taylor, Mark P, 1996. "Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries," Journal of Political Economy, University of Chicago Press, vol. 104(3), pages 488-509, June. [Downloadable!] (restricted)
  25. Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, vol. 11(05), pages 984-1014, October. [Downloadable!]
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Apte, Prakesh & Sercu, Piet & Uppal, Raman, 2002. "The Exchange Rate and Purchasing Power Parity: Extending the Theory and Tests," CEPR Discussion Papers 3343, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  2. Maurice Obstfeld & Alan M. Taylor, 1999. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Working Papers 5960, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Imed Drine & Christophe Rault, 2003. "Do panel data permit the rescue of the Balassa-Samuelson hypothesis for Latin American countries?," Applied Economics, Taylor and Francis Journals, vol. 35(3), pages 351-359, January. [Downloadable!] (restricted)
  4. Jacobson, Tor & Lyhagen, Johan & Larsson, Rolf & Nessén, Marianne, 2002. "Inflation, Exchange Rates and PPP in a Multivariate Panel Cointegration Model," Working Paper Series 145, Sveriges Riksbank (Central Bank of Sweden). [Downloadable!]
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  5. Peter Hans Matthews, 2004. "Paradise Lost and Found? The Econometric Contributions of Clive W.J. Granger and Robert F. Engle," Middlebury College Working Paper Series 0416, Middlebury College, Department of Economics. [Downloadable!]
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  6. Imed Drine & Christophe Rault, 2003. "A re-examination of the Purchasing Power Parity using non-stationary dynamic panel methods : a comparative approach for developing and developed countries," William Davidson Institute Working Papers Series 2003-570, William Davidson Institute at the University of Michigan Stephen M. Ross Business School. [Downloadable!]
  7. Christopher F. Baum & Mustafa Caglayan & John Barkoulas, 1998. "Nonlinear Adjustment to Purchasing Power Parity in the post-Bretton Woods Era," Boston College Working Papers in Economics 404., Boston College Department of Economics, revised 16 Nov 1999. [Downloadable!]
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  8. Alan M. Taylor, 1996. "International Capital Mobility in History: The Saving-Investment Relationship," NBER Working Papers 5743, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Imed Drine & Christophe Rault, 2008. "Purchasing Power Parity for Developing and Developed Countries. What can we Learn from Non-Stationary Panel Data Models?," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  10. Gabriella Legrenzi & Costas Milas, 2005. "Non-linear real exchange rate effects in the UK labour market," Macroeconomics 0507019, EconWPA. [Downloadable!]
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  11. Alan M. Taylor, 1997. "Argentina and the World Capital Market: Saving, Investment, and International Capital Mobility in the Twentieth Century," NBER Working Papers 6302, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  12. António Portugal Duarte, 2005. "Purchasing power parity: an empirical study of three EMU countries," International Finance 0505010, EconWPA. [Downloadable!]
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  13. Alan M. Taylor, 2000. "Potential Pitfalls for the Purchasing-Power-Parity Puzzle? Sampling and Specification Biases in Mean-Reversion Tests of the Law of One Price," NBER Working Papers 7577, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  14. Maurice Obstfeld & Alan M. Taylor, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," NBER Working Papers 6053, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  15. Alan M. Taylor, 2000. "A Century of Purchasing-Power Parity," NBER Working Papers 8012, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Pär Österholm & Mikael Carlsson & Johan Lyhagen, 2007. "Testing for Purchasing Power Parity in Cointegrated Panels," IMF Working Papers 07/287, International Monetary Fund. [Downloadable!]
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  17. Erdal Özmen & Aysun Gökcan, 2004. "Deviations from PPP and UIP in a financially open economy: the Turkish evidence," Applied Financial Economics, Taylor and Francis Journals, vol. 14(11), pages 779-784, July. [Downloadable!] (restricted)
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