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Measuring Market Integration: A Model of Arbitrage with an Econometric Application to the Gold Standard, 1879-1913

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Gauri Prakash
Alan M. Taylor

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Abstract

A major question in the literature on the classical gold standard concerns the efficiency of international arbitrage. Most authors have examined efficiency by looking at the spread of the gold points, gold-point violations, the flow of gold in profitable or unprofitable directions, or by tests of various asset market criteria, including speculative efficiency and interest arbitrage. These studies have suffered from many limitations, both methodological and empirical. We offer a new methodology for measuring market integration, based on a theoretical model of arbitrage applicable to any type of market. The model is econometrically tractable using the techniques of threshold autoregressions. We study the efficiency of the dollar-sterling gold standard in this framework, and we radically improve the empirical basis for investigation by compiling a new, high-frequency series of continuous daily data from 1879 to 1913. Using data at this frequency we can derive reasonable econometric estimates of the size of transaction-cost bands (as compared with direct cost estimates). We can also estimate the speed of adjustment through which disequilibria (gold-point violations) were corrected. The changes in these measures over time provides an insight into the evolution of market integration in the classical gold standard.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6073.

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Date of creation: Jun 1997
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Handle: RePEc:nbr:nberwo:6073

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Find related papers by JEL classification:
N1 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations
F3 - International Economics - - International Finance

References listed on IDEAS
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  1. Obstfeld, Maurice & Taylor, Alan M, 1997. "Nonlinear Aspects of Goods-Market Arbitrage and Adjustment: Heckscher's Commodity Points Revisited," CEPR Discussion Papers 1672, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  2. Krugman, Paul R, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, MIT Press, vol. 106(3), pages 669-82, August. [Downloadable!] (restricted)
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  3. Balke, Nathan S & Fomby, Thomas B, 1997. "Threshold Cointegration," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 38(3), pages 627-45, August.
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  4. Barry Eichengreen., 1990. "Trends and Cycles in Foreign Lending," Economics Working Papers 90-146, University of California at Berkeley. [Downloadable!]
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  5. Obstfeld, Maurice & Taylor, Alan M, 1997. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," CEPR Discussion Papers 1633, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Officer, Lawrence H., 1983. "Dollar-Sterling Mint Parity and Exchange Rates, 1791?1834," The Journal of Economic History, Cambridge University Press, vol. 43(03), pages 579-616, September. [Downloadable!]
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  1. Ihle, Rico & Cramon-Taubadel, Stephan von, 2008. "A Comparison of Threshold Cointegration and Markov-Switching Vector Error Correction Models in Price Transmission Analysis," 2008 Conference, April 21-22, 2008, St. Louis, Missouri 37603, NCCC-134 Conference on Applied Commodity Price Analysis, Forecasting, and Market Risk Management. [Downloadable!]
  2. 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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