International Capital Mobility in History: Purchasing-Power Parity in the Long Run
This paper investigates purchasing-power parity (PPP) since the late nineteenth century for a sample of twenty countries, a broader sample of pooled annual data than has been studied before. Econometric results for time-series and panel samples allows us to test the robustness of the PPP hypothesis in different eras: the gold-standard, interwar, Bretton Woods, and the recent float. The evidence for PPP is mixed: Strong PPP, entailing stationarity of the real exchange rate, is not broadly supported, and real-exchange-rate dispersion shows counterintuitive historical patterns. However, not-much-weaker forms of PPP can be supported, with evidence of cointegration between different countries' common-currency price levels. Residual variances here confirm the conventional wisdom that the interwar period, particularly the Great Depression, represented the nadir of international capital market integration in the modern era.
Published: Published as "Argentina and the World Capital Market: Saving, Investment,and International Capital Mobility in the Twentieth Century", Journal of Development Economics, Vol. 57, no. 1 (October 1998): 147-184.