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Exchange rate behavior and exchange rate puzzles: why the 18th century might help

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  • Sánchez, Rafael Torres
  • Biscarri, Javier Gómez
  • de Gracia, Fernando Pérez

Abstract

This article explores the behavior of exchange rates in Spain during the 18th century. We analyze the exchange rates quoted in London on three Spanish cities between 1699 and 1826. After a brief review of how the Spanish monetary system worked and how exchange rates were determined, we assess to which extent the exchange rate responded to market fundamentals by testing two theoretical models of exchange rate determination. The results suggest that purchasing power parity held during the 18th 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 between Spain and Great Britain and, maybe, due to productivity differentials.

Suggested Citation

  • Sánchez, Rafael Torres & Biscarri, Javier Gómez & de Gracia, Fernando Pérez, 2005. "Exchange rate behavior and exchange rate puzzles: why the 18th century might help," Revista de Historia Económica / Journal of Iberian and Latin American Economic History, Cambridge University Press, vol. 23(1), pages 143-174, March.
    • Handle: RePEc:cup:reveco:v:23:y:2005:i:01:p:143-174_01
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