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The Dollar-Pound Exchange Rate During the First Nine Months of World War II

  • Bryce Kanago

    ()

  • Ken McCormick

    ()

Between August 25, 1939 and June 7, 1940, there was a free market for British pounds in New York. German success at the outset of World War II caused the value of free sterling to fall relative to the official exchange rate. This imposed an externality that made it more difficult for Britain to finance the war. Eventually, the externality became large enough that Britain chose to take extreme measures to abolish it, even at the expense of tarnishing the reputation of London’s financial markets. We collected daily data to investigate how the market reacted to war news and to policy changes. Using methods developed by Bai and Perron (Econometrica 66:47–78, 1998 ; Journal of Applied Econometrics 18:1–22, 2003 ), we find 17 breaks in the exchange rate. Fourteen are associated with military events and three are associated with policy changes. The episode illustrates how markets can fail to serve the public interest during times of war. Copyright International Atlantic Economic Society 2013

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File URL: http://hdl.handle.net/10.1007/s11293-013-9380-4
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Article provided by International Atlantic Economic Society in its journal Atlantic Economic Journal.

Volume (Year): 41 (2013)
Issue (Month): 4 (December)
Pages: 385-404

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Handle: RePEc:kap:atlecj:v:41:y:2013:i:4:p:385-404
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  1. Frey, Bruno S. & Kucher, Marcel, 2000. "History as Reflected in Capital Markets: The Case of World War II," The Journal of Economic History, Cambridge University Press, vol. 60(02), pages 468-496, June.
  2. Daniel Waldenström & Bruno S. Frey, 2007. "Did Nordic Countries Recognize the Gathering Storm of World War II? Evidence from the Bond Markets," IEW - Working Papers 336, Institute for Empirical Research in Economics - University of Zurich.
  3. Benjamin H. Higgins, 1949. "Introduction to "Lombard Street in War and Reconstruction"," NBER Chapters, in: Lombard Street in War and Reconstruction, pages 1-2 National Bureau of Economic Research, Inc.
  4. Hall, George J., 2004. "Exchange rates and casualties during the first world war," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1711-1742, November.
  5. repec:cup:jechis:v:60:y:2000:i:02:p:468-496_00 is not listed on IDEAS
  6. BAI, Jushan & PERRON, Pierre, 1998. "Computation and Analysis of Multiple Structural-Change Models," Cahiers de recherche 9807, Universite de Montreal, Departement de sciences economiques.
  7. Perron, P. & Bai, J., 1995. "Estimating and Testing Linear Models with Multiple Structural Changes," Cahiers de recherche 9552, Universite de Montreal, Departement de sciences economiques.
  8. Phillips, Ronnie J., 1988. "War news and black market exchange rate deviations from purchasing power parity : Wartime South Vietnam," Journal of International Economics, Elsevier, vol. 25(3-4), pages 373-378, November.
  9. Frey, Bruno S & Kucher, Marcel, 2001. "Wars and Markets: How Bond Values Reflect the Second World War," Economica, London School of Economics and Political Science, vol. 68(271), pages 317-333, August.
  10. Benjamin H. Higgins, 1949. "Lombard Street in War and Reconstruction," NBER Books, National Bureau of Economic Research, Inc, number higg49-1.
  11. Brown, William O, Jr & Burdekin, Richard C K, 2002. "German Debt Traded in London during the Second World War: A British Perspective on Hitler," Economica, London School of Economics and Political Science, vol. 69(276), pages 655-69, November.
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