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

Author

Listed:
  • 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.

Suggested Citation

  • Rafael Torres Sánchez & Javier Gómez Biscarri & Fernando Pérez de Gracia, 2004. "Exchange Rate Behavior and Exchange Rate Puzzles: Why the XVIII Century Might Help," Faculty Working Papers 12/04, School of Economics and Business Administration, University of Navarra.
    • Handle: RePEc:una:unccee:wp1204
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    References listed on IDEAS

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    3. 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.
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    5. 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 / Journal of Iberian and Latin American Economic History, Cambridge University Press, vol. 5(3), pages 485-507, December.
    6. Neal, Larry, 2000. "How it all began: the monetary and financial architecture of Europe during the first global capital markets, 1648 1815," Financial History Review, Cambridge University Press, vol. 7(02), pages 117-140, October.
    7. Stephen Quinn, 1996. "Gold, silver, and the Glorious Revolution: arbitrage between bills of exchange and bullion," Economic History Review, Economic History Society, vol. 49(3), pages 473-490, August.
    8. Isard,Peter, 1995. "Exchange Rate Economics," Cambridge Books, Cambridge University Press, number 9780521466004.
    9. Froot, Kenneth A. & Rogoff, Kenneth, 1995. "Perspectives on PPP and long-run real exchange rates," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 32, pages 1647-1688, Elsevier.
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    12. de la Escosura, Leandro Prados, 1984. "El comercio hispano-britanico en los siglos XVIII y XIX. I. Reconstruccion," Revista de Historia Económica / Journal of Iberian and Latin American Economic History, Cambridge University Press, vol. 2(2), pages 113-162, September.
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    Cited by:

    1. Rafael Torres, 2006. "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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    More about this item

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N13 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: Pre-1913
    • N23 - Economic History - - Financial Markets and Institutions - - - Europe: Pre-1913

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