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The Law of One Price Over 700 Years

Author

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  • Kenneth Rogoff
  • Kenneth Froot
  • Michael Kim

Abstract

This paper examines annual commodity price data from England and Holland over a span of seven centuries. Our data incorporates transaction prices on seven commodities: barley, butter, cheese, oats, peas, silver, and wheat, as well as pound/shilling nominal exchange rates going back, in some cases, to 1273. We find that the magnitude, volatility, and persistence of deviations from the law of one price have not declined by as much as one might expect. We find this despite lower transport costs, reduced trade protection, and fewer wars and plagues in the modern era. Our analysis is consistent with growing evidence that goods-market arbitrage remains highly imperfect, even today.

Suggested Citation

  • Kenneth Rogoff & Kenneth Froot & Michael Kim, 2001. "The Law of One Price Over 700 Years," IMF Working Papers 01/174, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:01/174
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    References listed on IDEAS

    as
    1. Giovannini, Alberto, 1988. "Exchange rates and traded goods prices," Journal of International Economics, Elsevier, vol. 24(1-2), pages 45-68, February.
    2. John H. Rogers, 1995. "Real shocks and real exchange rates in really long-term data," International Finance Discussion Papers 493, Board of Governors of the Federal Reserve System (U.S.).
    3. Charles Engel, 1991. "Is real exchange rate variability caused by relative price changes? An empirical investigation," Research Working Paper 91-02, Federal Reserve Bank of Kansas City.
    4. Rogers, John H. & Jenkins, Michael, 1995. "Haircuts or hysteresis? Sources of movements in real exchange rates," Journal of International Economics, Elsevier, vol. 38(3-4), pages 339-360, May.
    5. Lothian, James R. & Taylor, Mark P., 1997. "Real exchange rate behavior," Journal of International Money and Finance, Elsevier, vol. 16(6), pages 945-954, December.
    6. Isard, Peter, 1977. "How Far Can We Push the "Law of One Price"?," American Economic Review, American Economic Association, vol. 67(5), pages 942-948, December.
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    More about this item

    Keywords

    International finance; Netherlands; Foreign exchange; Purchasing power; United Kingdom; purchasing power parity; exchange rates; exchange rate; time series; missing observations; statistics; Parity Exchange Rates;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General

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