CRIF Working Paper No. 04001

Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod-Balassa-Samuelson Effect?

Title: Real Exchange Rates Over the Past Two Centuries: How Important is the Harrod-Balassa-Samuelson Effect?

Author: James R. Lothian (Fordham University) and Mark P. Taylor (University of Warwick and CEPR, London)

Contact: lothian@fordham.edu, mark.taylor@warwick.ac.uk 

Keywords: Purchasing power parity, real exchange rate, nonlinear dynamics, Harrod-Balassa-Samuelson effect, productivity differentials

JEL Classification: F31, F41, C1

Abstract: Using data for 1820-2001 for the US, the UK and France, we test for the presence of real effects on the equilibrium real exchange rate (the Harrod-Balassa-Samuelson, HBS effect) in an explicitly nonlinear framework and allowing for shifts in real exchange rate volatility. A statistically significant HBS effect for sterling-dollar captures its long-run trend and explains some 40% of its variation. For both real exchange rates there is significant evidence of nonlinear mean reversion towards long-run equilibrium and downwards shifts in volatility corresponding closely to the classical gold standard and Bretton Woods periods.  

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