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

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  • Alan M. Taylor

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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Bibliographic Info

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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Publication status: Published as "Argentina and the World Capital Market: Saving, Investment,and International Capital Mobility in the Twentieth Century", Journal of Development Economics, Vol. 57, no. 1 (October 1998): 147-184.
Handle: RePEc:nbr:nberwo:5742

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  1. Charles Engel, 1998. "Long-Run PPP May Not Hold After All," Working Papers, University of Washington, Department of Economics 0050, University of Washington, Department of Economics.
  2. Jeffrey A. Frankel & Andrew K. Rose, 1995. "A Panel Project on Purchasing Power Parity: Mean Reversion Within and Between Countries," NBER Working Papers 5006, National Bureau of Economic Research, Inc.
  3. Eichengreen, Barry, 1990. "Trends and Cycles in Foreign Lending," CEPR Discussion Papers, C.E.P.R. Discussion Papers 451, C.E.P.R. Discussion Papers.
  4. Bruce E. Hansen, 1995. "Rethinking the Univariate Approach to Unit Root Testing: Using Covariates to Increase Power," Boston College Working Papers in Economics, Boston College Department of Economics 300., Boston College Department of Economics.
  5. Jeffrey G. Williamson, 1992. "The Evolution of Global Labor Markets Since 1830 Background Evidence and Hypotheses," NBER Historical Working Papers, National Bureau of Economic Research, Inc 0036, National Bureau of Economic Research, Inc.
  6. Taylor, Alan M. & Williamson, Jeffrey G., 1997. "Convergence in the age of mass migration," European Review of Economic History, Cambridge University Press, Cambridge University Press, vol. 1(01), pages 27-63, April.
  7. repec:cup:etheor:v:11:y:1995:i:5:p:984-1014 is not listed on IDEAS
  8. Mark P. Taylor, 1995. "The Economics of Exchange Rates," Journal of Economic Literature, American Economic Association, vol. 33(1), pages 13-47, March.
  9. Abuaf, Niso & Jorion, Philippe, 1990. " Purchasing Power Parity in the Long Run," Journal of Finance, American Finance Association, American Finance Association, vol. 45(1), pages 157-74, March.
  10. Jeroen J.M. Kremers & Neil R. Ericsson & Juan J. Dolado, 1992. "The power of cointegration tests," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 431, Board of Governors of the Federal Reserve System (U.S.).
  11. 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, Elsevier, vol. 16(1), pages 1-17, February.
  12. repec:cup:etheor:v:11:y:1995:i:5:p:1148-71 is not listed on IDEAS
  13. Francis X. Diebold & Steven Husted & Mark Rush, 1990. "Real exchange rates under the gold standard," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 32, Federal Reserve Bank of Minneapolis.
  14. Alan M. Taylor, 1996. "International Capital Mobility in History: The Saving-Investment Relationship," NBER Working Papers 5743, National Bureau of Economic Research, Inc.
  15. Lothian, James R., 1990. "A century plus of Yen exchange rate behavior," Japan and the World Economy, Elsevier, Elsevier, vol. 2(1), pages 47-70, March.
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  17. Ken Froot & Kenneth Rogoff, . "Perspectives on PPP and Long-Run Real Exchange Rates," Working Paper 32027, Harvard University OpenScholar.
  18. Glen, Jack D., 1992. "Real exchange rates in the short, medium, and long run," Journal of International Economics, Elsevier, Elsevier, vol. 33(1-2), pages 147-166, August.
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  20. Jeffrey G. Williamson, 1995. "Globalization, Convergence and History," NBER Working Papers 5259, National Bureau of Economic Research, Inc.
  21. 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, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 37(3), pages 499-530, August.
  22. Horvath, Michael T.K. & Watson, Mark W., 1995. "Testing for Cointegration When Some of the Cointegrating Vectors are Prespecified," Econometric Theory, Cambridge University Press, Cambridge University Press, vol. 11(05), pages 984-1014, October.
  23. 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, University of Chicago Press, vol. 104(3), pages 488-509, June.
  24. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, Elsevier, vol. 108(1), pages 1-24, May.
  25. Baumol, William J, 1986. "Productivity Growth, Convergence, and Welfare: What the Long-run Data Show," American Economic Review, American Economic Association, American Economic Association, vol. 76(5), pages 1072-85, December.
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