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

Abstract

ABSTRACT 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. Acknowledgemen t: This paper circulated earlier under the title “Movements in Exchange Rates and Relative Price Levels in the Netherlands and Britain over the Past Four Centuries,” with Lothian as the sole author. We would like to thank Michael Edelstein, Barry Goodwin., Thomas Grennes, Larry Sjaastad, Alan Taylor and participants at workshops at the University of Chicago and North Carolina State University for their comments on that version of this paper, and participants at workshops at Fordahm University for their comments on an earlier draft of this paper. The views expressed in the paper are those of the authors and do not necessarily reflect those of the Bank of Greece.

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