Working Papers

WP 005

Movement in Exchange Rates and Relative Price Levels in the Netherlands and Britain over the Past Four Centuries

This paper examines exchange-rate and price-level data for the long period 1628-1998 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. The exchange rate regime moreover appears not to have mattered. Adam Smith's dictum that there is "much ruin in a nation" appears to apply here as elsewhere.