Exchange rate regimes and prices: The cases of Italy, Spain and the United Kingdom (1874-1998)

This paper studies the relationship among Italian, Spanish and United Kingdom prices over the period 1874-1998, for most of which the currencies of these three countries maintained a floating exchange rate regime. By using cointegration techniques with broken linear trends, we find a single vector for the period 1874-1935 and two vectors and, consequently, a single common trend for the period 1940-1998. Therefore, this paper provides new evidence of no long-run monetary independence under floating regimes. Furthermore, the price differential dynamics captured by deterministic trends in the period 1940-1998, as well as agreeing with the evidence of long-run transmission of interest rates in the floating post-Bretton Woods era, fit in perfectly with the new de facto taxonomies on exchange rates.