Five pitfalls commonly encountered in estimating the yield on British Consols are identified and discussed herein. The most difficult question is whether Consol prices in the later 1890s reflected expectations of a conversion of the Consol stock in 1923. This is equivalent to asking whether security markets in the 1890s regarded the then extremely low interest rates to be a temporary or permanent phenomenon. Predictions from estimated equations for the yield spread between other high-class investments and Consols are used to determine this question. A corrected monthly series of the yield on Consols between 1850 and 1914 is presented.
In a sample that contains annual prices of 39 selected commodities in Britain and Germany in the period 1850 to 1913 substantial evidence of well integrated commodity markets is found. The degree of integration is not universal across markets and varies over time, however. Absolute price variability was in general decresing over the period, indicating more closely integrated markets. But the reintroduction of tariffs in Germany beginning in 1879 implied that this trend was broken for a number of commodities. Nevertheless, once the impact of tariffs is accounted for, grain market prices are well synchronized. In contrast, markets for animal foodstuffs appear not to be integrated, which is to be expected given the existence of non-tariff barriers affecting meat and livestock markets. The price movements of non-ferrous metals, many textiles and some other raw materials are in accordance with the law of one price. The speed of adjustments of prices, measured by estimates of the half-life of LOP deviations, is a little more than one year, which is substantially lower than what is found in many other studies of market integration.
Annual data from Norway and the United Kingdom from 1874 to 1971 are used to reassess the empirical performance of the purchasing power parity (PPP) doctrine. The simple version of the PPP relationship is supported by the data only if different short‐run dynamics during a floating‐rate period 1914–1928 is allowed for. Two sets of factors were found to be important in amending the simple PPP model. These were short‐run cyclical variables affecting the adjustment towards the PPP equilibrium relationship and long‐run structural factors such as productivity and terms of trade. Within this expanded model the proportionality between the exchange rate and relative price levels could not be rejected.
The reemergence of empirical research on the purchasing power parity hypothesis (henceforth PPP) in the 1970's does not seem to have led to any consensus as to its general empirical validity. On the one hand, Gailliot, Myhrman, Officer and Friedman have presented historical evidence for many countries and over many time periods which supports the basic PPP hypothesis, i.e., that trends in relative price levels between two countries are offset by movements in the exchange rate in the long run. This conclusion stands out most clearly during time periods dominated by monetary disturbances. On the other hand, these findings contract sharply with the experience of the 1970's where evidence suggest persistent divergences of exchange rates from PPP.
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