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On the Relevance of the Purchasing Power Hypothesis as a Determinant of Exchange Rate Equilibrium in the Post WWI French Franc Floating Exchange Rate Period

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  • Giulio Cifarelli
  • Paolo Paesani

Abstract

The French franc variability of the 1920-1926 time interval is often attributed to irrational speculation. A common view is that French investors, disregarding fundamentals, were prone to export their funds in response to adverse financial/political news, destabilizing in this way the exchange rate. Our analysis, based on a new dataset, qualifies these results. The estimates of a Markov-switching Heterogeneous Agents Model strongly support the hypothesis that informed speculators relied on the relative purchasing power parity paradigm and drove the short run exchange rate dynamics, bandwagon effects being but short lived. In line with previous analyses the impact of additional explanatory variables, real and financial, turns out to be rather limited.

Suggested Citation

  • Giulio Cifarelli & Paolo Paesani, 2024. "On the Relevance of the Purchasing Power Hypothesis as a Determinant of Exchange Rate Equilibrium in the Post WWI French Franc Floating Exchange Rate Period," Working Papers - Economics wp2024_24.rdf, Universita' degli Studi di Firenze, Dipartimento di Scienze per l'Economia e l'Impresa.
    • Handle: RePEc:frz:wpaper:wp2024_24.rdf
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    References listed on IDEAS

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    1. Eichengreen, Barry J., 1982. "Did speculation destabilize the French Franc in the 1920s?," Explorations in Economic History, Elsevier, vol. 19(1), pages 71-100, January.
    2. Frenkel, Jacob A, 1980. "Exchange Rates, Prices, and Money: Lessons from the 1920's," American Economic Review, American Economic Association, vol. 70(2), pages 235-242, May.
    3. Jacob A. Frenkel, 1980. "Exchange Rates, Prices and Money: Lessons from the 1920s," NBER Working Papers 0452, National Bureau of Economic Research, Inc.
    4. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-384, March.
    5. Jean-Claude Debeir, 1980. "Inflation et stabilisation en France 1919-1928," Revue Économique, Programme National Persée, vol. 31(4), pages 622-647.
    6. Lothian, James R., 2016. "Purchasing power parity and the behavior of prices and nominal exchange rates across exchange-rate regimes," Journal of International Money and Finance, Elsevier, vol. 69(C), pages 5-21.
    7. Muriel Dal-Pont Legrand & Dominique Torre, 2014. "Pierre Quesnay (1895-1937) from the League of Nations to the Franc Poincaré: Financial Discipline and Monetary Pragmatism," GREDEG Working Papers 2014-43, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
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    More about this item

    Keywords

    Gold Standard; HAM French Franc pricing; Markov Switching;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • N24 - Economic History - - Financial Markets and Institutions - - - Europe: 1913-

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