I estimate two factor models of Swiss exchange rates during the FirstWorldWar. I have data for five of the primary belligerents: Britain, France, Italy, Germany, and Austria-Hungary. At the outbreak of the war, these nations suspended convertibility of their currencies into gold with the promise that after the war each would restore convertibility at the old par. However, once convertibility was suspended, the value of each currency depended on the outcome of the war. I decompose exchange rate movements into a common trend, a common factor, and country-specific factors. Movements in the common trend are consistent with the quantity theory of money. The common factor contains information on contemporaries' expectations about the war's resolution. Innovations to this common factor are correlated with time series on soldiers killed, wounded, and taken prisoner.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
9261.
Length: Date of creation: Oct 2002 Date of revision: Handle: RePEc:nbr:nberwo:9261
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Find related papers by JEL classification: N1 - Economic History - - Macroeconomics and Monetary Economics; Growth and Fluctuations E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
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