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

  • 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)

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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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
Contact details of provider: Web page: http://www.unav.es/facultad/econom

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  1. 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.
  2. Kenneth A. Froot & Kenneth Rogoff, 1994. "Perspectives on PPP and Long-Run Real Exchange Rates," NBER Working Papers 4952, National Bureau of Economic Research, Inc.
  3. 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, 08.
  4. repec:cup:cbooks:9780521457385 is not listed on IDEAS
  5. Motomura, Akira, 1994. "The Best and Worst of Currencies: Seigniorage and Currency Policy in Spain, 1597–1650," The Journal of Economic History, Cambridge University Press, vol. 54(01), pages 104-127, March.
  6. 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.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
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