The Internationalization of Money and Finance and the Globalization of Financial Markets

In this paper I combine long multi-country time series data for interest rates and stock returns with the institutional evidence for much earlier centuries amassed by economic historians to study the question of financial globalization and how it has altered since the late classical era. At their longest, for Dutch and English short-term interest rates, the quantitative data that I use extend back slightly more than three centuries. The institutional history provides information on an additional millennium's worth of experience. The conclusion that I reach is that the internationalization of money and finance and the globalization of financial markets are not new phenomena. They are part of an evolutionary process that began much earlier and that has continued, albeit with periodic interruptions and reversals, for many centuries. What we see today is simply the latest and most advanced manifestation of this process.Financial Integration, real interest rates, real stock returns, international money, financial history

Uncovered Interest Rate Parity Over the Past Two Centuries

Uncovered interest rate parity (UIP) is one of three key theoretical relations used in analytical work in both international finance and international monetary economics. The problem, however, is that UIP does not seem to hold up well empirically. In this paper, we argue that the failures of UIP that have been so widely documented are a coincidence of two empirical artifacts: (1) the unique sample period of the 1980s and (2) the noise induced by small UIP deviations. We control for these empirical artifacts by constructing an ultra long time series that spans two centuries and by running regressions conditional on large deviations from UIP. We find that traditional regressions yield positive slpe estimates over the whole sample period and become negative only when the sample is dominated by the period of the 1980s. We argue that the negative estimates during this sample period are mainly the result of a failure of expectations to adjust quickly to the regime changes in monetary policy that took place in both the United Kingdom and the United States. We also find that large interest rate differentials have significantly stronger forecasting powers for currency movements than small interest rate differentials. Finally, a historical account of expected and realized regime changes further illustrates how the expectation hypothesis holds over the very long haul but can be deviated from for a long period of time due to slow adjustment of expectations to actual regime changes or to anticipations for extended periods of regime changes or other big events that never materialize.Uncovered interest rate parity, expectation hypothesis, regime changes, small sample problem, Peso problem, extreme sampling

Exchange rates and prices in the Netherlands and Britain over the past four centuries

This paper examines exchange-rate and price-level data for the long period 1590-2009 for the Netherlands and the United Kingdom (earlier the Dutch Republic and England), countries that at various times over this near four century span have differed substantially in terms of the pace at which their economies were developing, have operated under a variety of exchange rate regimes, and have been subjected to an extremely wide variety of real shocks. The principal conclusion of this study is the resiliency of the simple purchasing-power-parity model and of the law of one price at the microeconomic level. Both take some heavy blows during this close to four-century long sample period. In the end, however, they emerge surprisingly unscathed. Real factors at times appear to have had substantial effects on real exchange rates and hence PPP, but such effects ultimately dissipate. As a long-run equilibrium condition, PPP holds up remarkably well.

Equity Returns and Inflation: The Puzzlingly Long Lags

This paper examines data for stock prices and price levels of 14 developed countries during the post-WWII era and compares their behavior in that sample with behavior over the past two centuries in the UK and the US. Contrary to much of the literature of the past several decades, we find that nominal equity prices do, in fact, keep pace with movements in the overall price level. Our results suggest, however, that this is only the case over long periods. The puzzle therefore is not that equities fail the test as inflation hedges, as had been quite widely believed, but that they take so long to pass.Stock prices, inflation, Fisher effect, neutrality, cointegration,Equity Returns,Inflation ,Long Lags

Real Exchange Rate Behavior Under Floating and Fixed Regimes

In this paper we examine the stability of the real exchange rate and the macroeconomic effects of alternative exchange-rate regimes, including currency union, on real exchange-rate behaviour. We focus on the Irish punt in order to exploit its diversity of experience over different nominal exchange rate regimes. We make both temporal and cross-country comparisons of real-exchange-rate stability for the Irish punt with sterling, the US dollar and the German mark. We reach two conclusions on the basis of our results. The first is that for Ireland, as for most other countries, purchasing power parity provides a reasonably good description of actual exchange rate behaviour over the long run. Our second principal conclusion concerns regime effects. Currency union appears to matter. The real exchange rates we analyse are unambiguously less variable under currency union than under alternative exchange-rate systems. Otherwise, however, we find no clear-cut differences in behaviour across regimes.Exchange Rates, purchasing power parity, exchange-rate regimes, currency union