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

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  • Rafael Torres Sánchez

    ()
    (School of Economics and Business Administration, University of Navarra)

  • Javier Gómez Biscarri

    ()
    (School of Economics and Business Administration, University of Navarra)

  • Fernando Pérez de Gracia

    ()
    (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.

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File URL: http://www.unav.es/facultad/econom/files/workingpapersmodule/@random437a054f974a0/1132583066_wp1204.pdf
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Bibliographic Info

Paper provided by School of Economics and Business Administration, University of Navarra in its series Faculty Working Papers with number 12/04.

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Length: 40 pages pages
Date of creation: Sep 2004
Date of revision:
Publication status: Published, Revista de Historia Economica, 2005, vol. 1: pp. 143-174
Handle: RePEc:una:unccee:wp1204

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Web page: http://www.unav.es/facultad/econom

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  1. Gelman, Jorge Daniel, 1987. "El gran comerciante y el sentido de la circulación monetaria en el Río de la Plata colonial tardío," Revista de Historia Económica, Cambridge University Press, vol. 5(03), pages 485-507, December.
  2. Frenkel, Jacob A, 1976. " A Monetary Approach to the Exchange Rate: Doctrinal Aspects and Empirical Evidence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 78(2), pages 200-224.
  3. 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.
  4. Reher, David S., 2001. "Producción, precios e integración de los mercados regionales de grano en la España preindustrial," Revista de Historia Económica, Cambridge University Press, vol. 19(03), pages 539-572, December.
  5. Schubert, Eric S., 1989. "Arbitrage in the foreign exchange markets of London and Amsterdam during the 18th century," Explorations in Economic History, Elsevier, vol. 26(1), pages 1-20, January.
  6. de la Escosura, Leandro Prados, 1984. "El comercio hispano-britanico en los siglos XVIII y XIX. I. Reconstruccion," Revista de Historia Económica, Cambridge University Press, vol. 2(02), pages 113-162, September.
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Cited by:
  1. Rafael Torres, . "Possibilities and Limits: Testing in the Fiscal Military State in the Anglo-Spanish War of 1779-1783," Faculty Working Papers 09/06, School of Economics and Business Administration, University of Navarra.

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