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Across time and regimes: 212 years of the US-UK real exchange rate.

I. INTRODUCTION

This paper examines the behavior of the real exchange rate under different nominal exchange rate regimes using monthly data on the US-UK exchange rate over the period 1794-2005. The 212-yr series encompasses five floating and four fixed exchange rate periods and includes a new monthly exchange rate series for the periods that precede the classical gold standard. Figures 1 and 2 show the behavior of the real and nominal exchange over the entire sample.

Three key stylized facts emerge from the analysis: (a) real exchange rate volatility is higher when the nominal exchange rate is floating, (b) the contribution of price-level changes to real exchange rate movements has decreased over time, and (c) the persistence of real exchange rate has been considerably higher in the postwar period.

The real exchange rate is the price of output in one country relative to another. That is, the real exchange rate is given by q = e[P.sup.*]/P, where P and [P.sup.*] are home and foreign price indexes and e is the nominal exchange rate, that is, the home price of foreign currency.

A key question that can be examined with a series that includes multiple regimes is whether real exchange rate behavior is invariant to the nominal exchange rate regime, that is, whether the properties of q depend on whether e is fixed or floating. Mussa (1986) demonstrates that short-term volatility of the real exchange rate is lower when the nominal exchange rate is fixed. Mussa's study relies on postwar data from OECD countries, most of which had fixed exchange rates until Bretton Woods collapsed in the early 1970s and floated thereafter.

As Grilli and Kaminsky (1991, hereafter GK) note, relying on such limited evidence is not sufficient to establish general validity of the proposition that real exchange rate volatility is higher under floating regimes. To remedy this, GK examined the US-UK real exchange rate using monthly data beginning in 1885. Their study encompassed three fixed rate periods: the classical gold standard, the interwar gold exchange standard, and Bretton Woods, and three floating periods: two interwar intervals and the post-Bretton Woods float. They conclude that "the nominal exchange rate regime is not as crucial to the behavior of the real exchange rate as previous analyses have suggested ... the behavior of the real exchange rate varies substantially across historical periods, but not nominal exchange rate arrangements (192)." In their analysis, the Bretton Woods period was characterized by a unique degree of stability. They argue that the commonly held belief that floating exchange rates lead to higher real exchange rate volatility is an artifact of the unusual stability of the 1950s and 1960s.

[FIGURE 1 OMITTED]

[FIGURE 2 OMITTED]

The additional data used in this study encompass two additional floating rate periods and one additional fixed rate period. GK are surely correct that real exchange rate behavior varies across different time periods due to the evolution of institutions--for example, decreasing transaction costs, development of the financial system, and increasing nominal rigidity. Comparing historically adjacent fixed and floating regimes provides a rough way to "control" for long-run historical changes in order to see whether the nominal regime matters for the real exchange rate.

Of all the periods examined, Bretton Woods clearly has the lowest real exchange rate volatility. However, Mussa's conclusion that real exchange rate volatility is higher in floating periods does not appear to be an artifact of this stability. Examining the entire 212-yr period, a consistent pattern emerges: every nominal regime switch from fixed to floating is associated with an increase in real exchange rate volatility, and every switch from floating to fixed is associated with a decrease.

Although there is a consistent relationship between the real exchange rate volatility and the nominal exchange rate regime, the source and persistence of real exchange rate movements have evolved considerably over time. It is well known that, under the current float, real and nominal exchange rates are highly correlated. In earlier periods, relative prices have played a much larger role in real exchange rate movements. Furthermore, the persistence of the real exchange rate, which has led many researchers to question whether it is stationary, has been considerably higher in the postwar period.

Mussa argues that higher real exchange rate volatility during floating regimes is evidence in favor of models featuring nominal rigidities. The finding here that relative price movements played a larger role in real exchange rate movements during earlier floating periods suggests that sticky prices may not be the whole story.

Overall, the additional data in this study confirm the finding by GK, Lothian and Taylor (1996), and others that the hypothesis of a unit root can be rejected in long series. Higher persistence in the postwar period is also consistent with GK's results. However, the addition of data from three additional regime periods provides support to Mussa's (1986) argument that real exchange volatility is higher when the nominal exchange rate floats. This result is also consistent with Taylor's (2002) finding in a multicountry study beginning with the classical gold standard era.

II. CHRONOLOGY OF NOMINAL EXCHANGE RATE REGIMES

This section provides an overview of the different nominal exchange rate regimes covered by this study. Because the time series extends to periods prior to the classical gold standard that have received little attention in the literature, a more careful explanation of these regimes and how they were classified is necessary.

It is worth noting that the regimes treated as "fixed" below did allow for limited nominal exchange rate movements and therefore might be considered as narrow "target zones." A period of time surrounding each of the two World Wars is classified as "wartime disruption/controls" and excluded from the analysis because extensive government intervention seriously disrupted the normal functioning of markets.

1. Initial Float (January 1794 to April 1821): Following the recommendation of Alexander Hamilton, the Coinage Act of 1792 established a bimetallic monetary standard for the United States. A dollar consisted of 371.25 fine grains of silver or 27.5 fine grains of gold, implying a ratio of silver to gold, the "mint ratio" of 15:1. Although this ratio was chosen by Hamilton to correspond to the prevailing market price, the market price ratio exceeded the mint ratio in subsequent years with the result that silver became the dominant part of the money as gold was more valuable as a commodity.1 The war of 1812 led U.S. banks outside New England to suspend specie payments from August 1814 until February 1817 (Hepburn 1903). During most of this period, Britain was on a paper standard, having suspended gold payments in 1797, partly due to the need to finance military expenditures. (2) Britain resumed gold payments on May 1, 1821, and maintained them until the First World War. (3)

2. De Facto Gold Standard (May 1821 to December 1861): This period begins with Britain's resumption of gold payments and ends when the United States begins a paper standard during the Civil War. Three distinct subperiods can be identified. Figure 4 plots the nominal exchange rate for 1794-1861, with the key transition dates marked.

2a. Indirect De Facto Gold Standard (May 1821 to July 1834): Because the U.S. mint ratio was below the market price of gold, the United States was on a de facto silver standard. France was also on a bimetallic standard, with a mint ratio of 15.5 beginning in 1803. Fisher (1894) shows how a large economy on a bimetallic standard could stabilize the relative price of the two metals. Flandreau (1996) argues that the effect of France's policy was to stabilize the world gold-silver price ratio. As Figure 3 illustrates, the world price ratio fluctuated between 15.5 and 16 during 1820-50. With fluctuations in the relative price of gold and silver constrained, the possible movement in the dollar-sterling exchange rate was limited. Therefore, Britain's resumption of gold payments can be reasonably viewed as the beginning of a period of effectively constrained exchange rates.

The Coinage Act of 1834 reduced the gold content of the dollar so that the mint ratio fell to 16:1 as of July 31 with the intention of remedying the disappearance of gold from circulation in the United States. (4) Because the new parity was greater than the market ratio, gold soon replaced silver as the circulating medium, and the United States joined the gold standard de facto, if not de jure. (5)

[FIGURE 3 OMITTED]

2b. Suspension Period (May 1837 to March 1842): The United States experienced several episodes during 1837-42 when banks suspended specie payments. During these episodes, banks continued to function but would not exchange their notes for gold and silver, causing their notes to trade at a discount. New York banks suspended on May 10, 1837, and were followed by banks in the rest of the country. The banks in New York resumed specie payments exactly 1 yr later but were not followed immediately across the country. A national resumption occurred in August 1838. Another suspension outside New York and New England began with the closing of the Second Bank of the United States in October 1839 lasting until March 1842. (6)

2c. Postsuspension De Facto Gold Standard (April 1842 to December 1861): After banks resumed specie payments, a period of relative monetary stability occurred. A brief notable exception occurred during the panic of 1857. The panic caused New York banks to suspend specie payments from October 13 until December 11 (Calomiris and Schweikart 1991).

3. Greenback Period (January 1862 to December 1878): To finance the Civil War, the United States began issuing legal tender notes, known as greenbacks, which were not redeemable for specie. During this period, the value of the greenbacks floated relative to gold, and there was an active market in gold primarily for foreign exchange purposes. (7)

4. Classical Gold Standard (January 1879 to June 1914): The United States resumed converting dollars into gold in 1879 and, in so doing, joined the gold standard. (8) This fixed the price of a pound sterling at $4.87.

5. Wartime Disruption/Controls (9) (July 1914 to March 1919): The beginning of the war disrupted the foreign exchange market. As Silber (2007) details, sterling appreciated above the gold export point, but limitations on shipping and high insurance costs limited arbitrage. Later in the year, demand for American goods led to upward pressure on the dollar. During the war, international gold movements were inhibited in a number of ways, both official and unofficial. The British government allowed sterling to float in March 1919.

6. First Interwar Float (April 1919 to April 1925): The pound floated against the dollar until May 1925, when Britain resumed payments in gold, at the prewar parity.

[FIGURE 4 OMITTED]

7. Gold Exchange Standard (May 1925 to August 1931): During this period, the dollar-sterling exchange rate was fixed at $4.87, and many other countries had returned to the gold standard as well. The arrangement was known as the gold exchange standard because countries held their reserves in the form of foreign currencies convertible into gold rather than in gold itself. (10)

8. Second Interwar Float (September 1931 to August 1939): Britain suspended convertibility of pounds into gold in September 1931. The United States suspended convertibility in 1933, restoring it at a devalued level of $35/oz in January 1935.

9. Wartime Disruption/Controls (September 1939 to September 1949): Britain established exchange controls immediately after declaring war in September 1939. The various controls established during the war were dismantled over time, and full convertibility was only restored in December 1958. For purposes of this study, the end of the wartime control period will be dated with Britain's September 1949 devaluation.

10. Bretton Woods (October 1949 to July 1971): The Bretton Woods agreement established a system of fixed exchange rates, with the U.S. dollar as a global reserve currency, convertible into gold at $35/oz. Under Bretton Woods, countries were allowed to change their exchange rate parities. Britain devalued the pound again in November 1967; the subperiod October 1949 to October 1967 does not include any parity changes.

11. Current Float (August 1971 to December 2005): The United States suspended convertibility of the dollar into gold on August 15, 1971. The Smithsonian agreement of December 1971 was an ultimately futile attempt to restore the fixed exchange rate system with revised parities and wider fluctuation bands. Britain floated the pound in June 1972, and by the end of March 1973, all the remaining industrialized countries had abandoned dollar pegs (Tew 1977, chap. 15).

III. ANALYSIS

All analyses are conducted with data in logarithms (represented by lowercase letters). The real exchange rate is related to the nominal exchange rate and national price levels of each country by the equation:

[q.sub.t] = [e.sub.t] + [p.sup.*.sub.t] - [p.sub.t],

where q is the logarithm of the real exchange rate, e is the logarithm of nominal exchange rate (dollars per pound), and [p.sup.*] and p are logarithms of the US-UK producer price levels, respectively. Table 1 reports the mean and standard deviation of the absolute value of the monthly change in the real exchange rate, nominal exchange rate, and US-UK price ratio for each period.

A. Nominal Regimes and Real Exchange Rate Volatility

Excluding the two wartime periods, five floating rate periods alternate with four fixed rate periods. Every fixed rate period has lower real exchange rate volatility than the adjacent floating periods, and every float has a higher volatility than the adjacent fixed periods. This is true whether measured by the mean percentage change or the standard deviation of the percentage change. (11) That is, a switch from a fixed to floating nominal regime has always coincided with an increase in real exchange rate volatility, and every switch from floating to fixed nominal rates has decreased real exchange rate volatility. The consistency of this pattern is evidence against the hypothesis that the nominal regime is neutral for the real exchange rate. (12) The changes in volatility across time and regimes are illustrated in Figure 5, which shows a rolling 12-mo average of the absolute change in q.

This finding is validated by comparing eight historically adjacent regime pairs (excluding the two wartime periods) using three formal statistical tests. Since the regimes alternate, each pair includes a floating and a fixed period.

The first, a test of the equality of two variances, is based on the ratio of the variances from two normally distributed samples having an F distribution (see Miller and Miller 1999, 427). This test is performed on the first difference of q. The results reported in Table 2 show that the null hypothesis of equal variances can be rejected strongly for all pairs.

The second test is the nonparametric Wilcoxon rank sum test. This tests the null hypothesis that two samples have identical medians (see Miller and Miller 1999, 539). This test is applied to the absolute value of the percentage change in the real exchange rate, [[DELTA]q], for each regime pair. The results in Table 2 show that the null of identical medians is strongly rejected for all but one pair. The one exception is the case of the de facto gold standard and the greenback period. However, if only the postsuspension de facto gold standard (Period 2c) is used, the hypothesis can be rejected at a 98% level.

The third test is that of Wald and Wolfowitz (1940), which is the test used by GK. To perform this nonparametric test, the first differences of the data from both samples are combined and sorted in order. The number of runs of consecutive observations from each sample are used to construct a test statistic (u), which is distributed N(0,1) under the null hypothesis that both samples are from the same population. For the real exchange rate, this test rejects the null at a 95% level in only four of eight cases.

[FIGURE 5 OMITTED]

The failure of the Wald-Wolfowitz test to reject the null in cases where it is easily rejected by the other tests suggests that it may have low power when applied to this type of data.

A simple Monte Carlo exercise confirms this: two 500-period samples of artificial data were created using estimates of AR(1) regressions on [q.sub.t] for Periods 1 and 2 and the Wald-Wolfowitz test was performed. In 10,000 repetitions of this procedure, the Wald-Wolfowitz test rejected the null in 24.5% of cases.

When all the floating and fixed regimes are pooled together (i.e., the entire sample except the two wartime disruptions is used), the null hypothesis is rejected by all three tests. This is also the case when the Bretton Woods period is excluded, which suggests that the finding of lower real exchange rate volatility during fixed exchange rates is not solely due to the particular stability of this era.

The pattern of lower volatility during fixed exchange rate periods holds for the relative price component, [p.sup.*] - p, by itself. The decrease in real exchange rate volatility under fixed exchange rates is therefore not only a product of lower nominal exchange rate volatility.

The same statistical tests are performed on the relative price component, [p.sup.*] - p, for the adjacent regime pairs. The results reported in Table 3 suggest that the pattern of changes in behavior of relative prices across regimes is clear but not quite as statistically robust as it is for the real exchange rate. The parametric test rejects the null of equal variances of the first difference of the price ratio for all pairs except one, the gold exchange standard and second interwar float. The Wilcoxon test rejects the null of equal medians for the absolute change in the price ratio in five of eight pairs. The Wald-Wolfowitz test rejects the null in three of eight cases.

B. The Decreasing Role of Relative Price Movements

The contribution of prices to the real exchange rate movements has decreased over time. The volatility of the absolute change in the price ratio has generally been falling--each floating regime has a lower mean absolute change in the price ratio than the previous float, and the same is true for fixed regimes.

Correlations between changes in real exchange rates, nominal exchange rates, and relative price levels are reported in Table 4. One well-known feature of the current float is the strong relationship between the nominal and the real exchange rates, with a correlation of .89. This relationship was not as strong in the nineteenth century; the correlation between real and nominal exchange rates was .69 in the greenback period and .47 in the initial float. Although the correlation between real and nominal exchange rates is positive in all floating periods, it is higher in the twentieth century than in the nineteenth.

Among floating periods, the initial float stands out as having a high correlation between the real exchange rate and the price ratio, with a correlation of .84. All other floating periods have a correlation of less than .5 between the real exchange rate and the price ratio. In all floating periods, there is a negative correlation between the nominal exchange rate and the price ratio. This has been strongest in the greenback period and in the interwar floats but relatively small in the initial float and the current float.

Table 5 reports the variance of the first difference of the real exchange rate. The relation Var(x + y) = Var(x) + Var(y) + 2Cov(x,y) is used to attribute the variance of [DELTA]q to portions due to the change in the nominal exchange rate, the change in the ratio of national price levels, and the covariance between the two. In all the nineteenth-century periods except the greenback period, the contribution of the price ratio component is much larger than the exchange rate component. The greenback period and the first interwar float are characterized by high variances of both components and a high negative covariance between the two. This is in sharp contrast to the current floating rate period, where the role of the nominal exchange rate is much larger than the price ratio.

Mussa (1986, 186-88) notes the higher degree of volatility in price levels during the nineteenth century. He attributes this partly to the fact that nineteenth-century price indexes were largely based on commodity prices, which are generally more volatile. Although a larger role for commodities might be expected to lead to greater price-level volatility, it is important to note that the real exchange rate depends on relative prices. If commodity markets are more internationally integrated than other goods markets, a larger role for commodities in the price indexes might actually lead to an understatement of real exchange rate movements. As shown in Table 4, the correlation between changes in the US-UK price levels was similar between the classical gold standard and the Bretton Woods.

The role of changes in the composition of price indexes can be examined using some alternate data. For the World War I period, the US-UK price data used here are from the Sauerbeck index and US-UK prices are from the Warren-Pearson index. The Sauerbeck index continued to be published through 1966, and Hanes (1998) constructed an annual WarrenPearson series for 1947-90. Table 6 report ssome properties of these series and an alternate real exchange rate series constructed using them for 1950-66.

Compared with the postwar Producer Price Index series used in this paper, these alternate price series are indeed more volatile. However, the correlations between the changes in the US-UK price series are only slightly lower with the Hanes and Sauerbeck series, and the volatility of the real exchange rate is only slightly higher. Although some caution is warranted in drawing conclusions based on such a limited amount of data, this suggests that the changing composition of price indexes may not be a crucial issue for understanding real exchange rate volatility.

C. Persistence and Purchasing Power Parity

Real exchange rate data can also provide evidence on the purchasing power parity (PPP) hypothesis. In its "absolute" form, PPP implies P = e[P.sup.*] or q = 1. The hypothesis is usually tested in its "relative" form, which implies that deviations from PPP should die out over time (i.e., q is stationary). The presence of a unit root in the real exchange rate would imply that it follows a random walk and that deviations from PPP are permanent, contradicting the relative PPP hypothesis. One of the primary motivations for the studies of GK and Lothian and Taylor (1996) was to assemble a longer time series to conduct unit root tests. As Lothian and Taylor (1997) explain, the failure of prior studies to reject the null hypothesis of a unit root may have been attributable to the low power of unit root tests in short time series. With longer data series, both GK and Lothian and Taylor (1996) were able to reject the unit root. Table 7 reports Phillips-Perron unit root test statistics. The null hypothesis of a unit root can be rejected for the entire sample, as well as for two long subperiods: January 1794 to June 1914 and July 1914 to December 2005. It can also be rejected at a 95% level for the de facto gold standard and classical gold standard periods. As GK also found, the test statistics illustrate that it is much more difficult to reject the unit root hypothesis during the postwar period, suggesting that real exchange rate movements have become more persistent.

Lothian and Taylor (1996) argue that a good fit from an AR(1) model is further evidence against the presence of a unit root in the real exchange rate. Table 8 presents results from regressing the real exchange rate on its own lag and a constant. In all cases, the AR(1) fits well--for every period except the First World War and the first interwar float, the [R.sup.2] is greater than .85. All the autoregressive coefficients are close to but less than unity. Except for the first interwar floating period, all the coefficients are greater than .9. There does not appear to be a consistent difference between fixed and floating regimes. The least persistence is exhibited by the first two interwar regimes, and the greatest persistence occurs under the predevaluation Bretton Woods period and the current float.

Another approach to examining the persistence of a time series is the variance ratio test of Cochrane (1988). The variance ratio is the variance at an interval of k periods relative to the variance of the first difference, divided by k. That is,

[v.sub.r] = 1 var([q.sub.t] - [q.sub.t-k])/ k var([q.sub.t] - [q.sub.t-1]).

For a series that is a combination of permanent and temporary components, the variance ratio represents the share of the variance attributable to the permanent component. Variance ratios at horizons from 6 to 48 mo are reported in Table 9. (13) For every period before Bretton Woods, the variance ratios are below 1 at both the 36- and the 48-mo horizons. This is further evidence that the high persistence of the real exchange rate is a postwar phenomenon.

The difference between pre- and postwar price indexes may be an important factor in this apparent increase in real exchange rate persistence. As reported in Table 6, the alternate Hanes and Sauerbeck price series exhibit much lower autocorrelation than the PPI series used in this paper. Moreover, when the real exchange rate is constructed using the alternate data, the autocorrelation decreases substantially.

IV. CONCLUSIONS

This paper uses a new monthly data series to extend the analysis of the US-UK real exchange rate back in time from the classical gold standard to 1794. The 212-yr series encompasses nine alternating periods of floating and fixed nominal exchange rate regimes.

The well-known increase in real exchange rate volatility following the collapse of the Bretton Woods system in the early 1970s is generally regarded as evidence against the hypothesis of nominal regime neutrality. However, as GK noted, real exchange rate behavior may be affected by many other institutional factors that have evolved considerably over two centuries.

Comparing the behavior of real exchange rate and its components across regimes and time periods indicates that GK are correct that considerable changes have taken place over time. The importance of nominal exchange rate movements relative to movements in relative prices has dramatically increased over time. The persistence of real exchange rate movements also appears to be substantially higher in the postwar period.

Despite significant changes over time, the nominal regime clearly matters for the behavior of the real exchange rate. Comparing historically adjacent regime periods provides a way to control for institutional changes. In every possible case, a switch from a fixed to a floating regime increases real exchange rate volatility and a switch from floating to fixed reduces it. The robustness of this finding across different periods-despite all the other changes in real exchange rate behavior that have occurred--serves to strengthen the finding that the nominal ex change rate regime matters for real exchange rate behavior.

V. DATA

A. Exchange Rates

This paper is the first to use a monthly exchange rate series for the period 1794-1878 constructed following the methodology used by Officer (1996) to construct a quarterly series. (14) The series is described in more detail in Craighead (2007).

During this time period, a spot market for foreign exchange did not exist; the relevant market was for bills of exchange, payable in sterling in London at a future date (most often, in 60 days). A series of prices of 60-days sterling bills of exchange comes from three sources:

1. January 1794 to October 1829: A series compiled by John White, cashier of the Second Bank of the United States, from actual transactions of two Baltimore mercantile houses report included in a report to the Congress by the Treasury (Ingham 1830).

2. November 1829 to December 1834: Monthly quotations in published sources in New York in a report to the Congress from the Treasury (Woodbury 1838).

3. January 1835 to December 1878: Monthly New York prices compiled in Martin (1898). (15)

In order to convert the prices of bills of exchange into an exchange rate series, the interest rate and broker's commission components were removed. For the period 1864-78, the Martin (1898) series is in gold terms, which is converted to greenback (currency) terms using Mitchell (1908).

Canjels, Prakash-Canjels, and Taylor (2004) compiled daily prices of sterling demand bills in New York from the Financial Review. Monthly averages of these data are used for January 1879 to December 1913. (16)

The Martin (1898) series continues through 1897. Continuing the constructed exchange rate series using these data and comparing them to the Canjels, Prakash-Canjels, and Taylor (2004) series used in the paper for 1879-97 shows that the change of data sources does not affect the properties of the real exchange rate. Taking the monthly correlation between the two [DELTA]e series is .914, and the standard deviations are virtually identical. A real exchange rate series, [DELTA]q, using extended Martin series for the nominal exchange rate has a correlation of .998 with the series used in the paper and virtually the same standard deviation.

Beginning with January 1914, the exchange rate is from the Federal Reserve Board.

B. Prices

The British price series is assembled from several sources. Gayer, Rostow, and Schwartz (1953) construct a monthly index of wholesale prices for 1794-1850. Sauerbeck (1886) developed a price index that was continued by The Statist and published in the Journal of the Royal Statistical Society. Klovland (1993) filled in the gap between the Gayer, Rostow, and Schwartz (1953) index and the Sauerbeck index. The series used in this paper has the following sources:

1794-1844: Gayer, Rostow, and Schwartz (1953, table 39)

1845-90: Klovland (1993, table A1)

1891-1919: Sauerbeck index (17)

1920-2005: UK Wholesale/Producer Price Index (18)

U.S. prices for 1794-1913 are taken from Warren and Pearson (1933, table 1, "Index Numbers of the Wholesale Prices of All Commodities, 1720 to 1933") and thereafter from the Bureau of Labor Statistics PPI for all commodities.

The gold-silver price ratios are the Adolf Soetbeer Hamburg series reported in Hepburn (1903).

ABBREVIATION

PPP: Purchasing Power Parity

doi: 10.1111/j.1465-7295.2009.00243.x

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Woodbury, L. "Report from the Secretary of the Treasury, in Compliance with a Resolution of the Senate of the 26th February, 1838, Transmitting Statements of the Rates of Exchange and Prices of Bank Notes at Different Periods." 318 S. doc. 457, 1838.

Yeager, L. B. International Monetary Relations: Theory, History and Policy. New York: Harper & Row, 1966.

(1.) Hamilton (1791) recognized the possibility that a deviation of the mint ratio from the market ratio could lead to de facto monometallism. He wrote: "one consequence of overvaluing either metal, in respect to the other, is the banishment of that which is undervalued." One possible cause of the increase in the market ratio may have been the establishment of a bimetallic standard in France in 1803, with a mint ratio of 15.5:1. According to Laughlin (1896, 30), "Gold coins were seldom seen during the largest part of this period from 1792 to 1834. Even when bankpaper was used, the reserves of the banks were generally in silver, not in gold. Whatever the cause of the change in the relative values, certain it is that gold disappeared, and that the United States had but a single silver currency as early as 1817, and probably earlier."

(2.) Gayer, Rostow, and Schwartz (1953, 44-54) discuss several views of the causes of the suspension.

(3.) The 1819 Resumption Act provided for payments in gold at a price decfining in three steps starting in February 1820. However, a large accumulation of gold at the Bank of England allowed for restoration of the prewar price ahead of schedule. See Gayer, Rostow, and Schwartz (1953,164455).

(4.) The discovery of gold in North Carolina and Georgia may have influenced the Congress (Hepburn 1903, 36-38).

(5.) According to Laughlin (1896, 86), "in the fall of 1834 gold began to move toward the United States in such quantities that for a time some alarm was created in London as to the amount of reserves in the Bank of England. It then became very difficult to get silver in the United States, and there began a displacement of silver by gold, irrespective of the issues of paper money, which at last culminated, when the discoveries of gold in 1848 had lowered the value of gold, in the entire disappearance of silver." This account is disputed by Martin (1968), who provides evidence that de facto silver monometallism only occurred during the period 1823-33. The 1834 change in the mint ratio resulted in an inflow of gold, but he finds that silver continued to circulate until 1850.

(6.) The suspension was interrupted with a brief resumption on January 15, 1841, but the Bank of the United States closed again on February 4, 1841 (Sumner 1884, 150).

(7.) See Friedman and Schwartz (1963, 25-27).

(8.) Resumption was effectively a joining of the gold standard because no silver coins had been included in the list of coins to be minted under the Coinage Act of 1873. This provision was little noticed at the time but subsequently became known as the "crime of 1873" when agricultural and silver mining interests sought an effective devaluation via coinage of silver in the depression years of the 1890s. It was not until the Gold Standard Act of 1900 that the ambiguity was resolved and the gold standard became law. See Friedman (1990).

(9.) The descriptions of Periods 5-10 are based on the history provided in Yeager (1966).

(10.) Friedman and Schwartz (1963, 359) argue that the gold exchange standard was more vulnerable to disturbances than the classical gold standard because "it raised the ratio of claims on the relevant high-powered money--in this case, ultimately, gold--to the amount of high-powered money available to meet those claims."

(11.) This pattern also holds for 12-mo changes.

(12.) Engel and Kim (1999) provide evidence against nominal regime neutrality in the US-UK real exchange rate over the period 1885-1995. They separate permanent and transitory components of the real exchange rate and estimate a Markov switching model of the transitory component. Estimated state changes coincide with changes in the nominal exchange rate regime.

(13.) Results were similar when the correction for bias suggested by GK (204) was performed.

(14.) Independently, Sylla, Wilson, and Wright (2006) also assembled a monthly exchange rate series for 1790-1845. Their focus is on market integration rather than exchange rate behavior.

(15.) For this period, Officer uses a series constructed from the Philadelphia metals trading firm of Nathan Trotter. This series has the advantage over Martin (1898) of being derived from actual transactions, but it has a lower frequency. For the most part, the two series track each other well.

(16.) I am grateful to Alan Taylor for supplying the data.

(17.) From "Wholesale Prices of Commodities in 1921," Journal of the Royal Statistical Society, March 1922. The alternate UK price series used in Table 9 is from "Wholesale Prices in 1960" and "Wholesale Prices in 1966," Journal of the Royal Statistical Society, Series A (General), 124(3) and 130(2).

(18.) For 1920-56, the data set compiled by GK from official publications is used. These data were used by Engel and Kim (1999) and made available on the Journal of Money, Credit and Banking Web site. For 1957-2005, the data are from the International Financial Statistics of the International Monetary Fund.

WILLIAM D. CRAIGHEAD

I am grateful to George Davis, David Hineline, Ming Lo, and John James as well as the coeditor, Dean Corbae, an anonymous referee, and participants at the 2006 Southern Economic Association and 2008 Midwest Economic Association annual meetings for helpful comments. Any mistakes are, of course, my own.

Craighead: Assistant Professor, Department of Economics, Farmer School of Business, Miami University, Oxford, OH 45056. Phone 1-513-529-2849, Fax 1513-529-8047, E-mail craighwd@muohio.edu
TABLE 1
Exchange Rate Behavior under Different Regimes

 Real Exchange
 Rate [absolute value
 of [DELTA]q]

Period Mean SD

1. Initial float (January 1794 to April 1821) 0.0266 0.0214

2. De facto gold standard (May 1821 to 0.0202 0.0163
December 1861)

 2a. Indirect de facto gold standard 0.0220 0.0157
 (May 1821 to July 1834)

 2b. U.S. bank suspension period 0.0203 0.0171
 (May 1837 to March 1842)

 2c. Postsuspension de facto gold standard 0.0186 0.0159
 (April 1842 to December 1861)

3. Greenback period (January 1862 to December 0.0252 0.0262
1878)

4. Classical gold standard (January 1879 to 0.0117 0.0094
June 1914)

5. Wartime disruption/controls (July 1914 to 0.0175 0.0167
March 1919)

6. First interwar float (April 1919 to April 0.0203 0.0196
1925)

7. Gold exchange standard (May 1925 to August 0.0098 0.0074
1931)

8. Second interwar float (September 1931 to 0.0177 0.0186
August 1939)

9. Wartime disruption/controls 0.0152 0.0231
(September 1939 to September 1949)

10. Bretton Woods (October 1949 to July 1971) 0.0055 0.0082

 10a. Predevaluation Bretton 0.0049 0.0046
 Woods (October 1949 to October 1967)

11. Current float (August 1971 to December 0.0197 0.0189
2005)

 Nominal Exchange
 Rate [absolute value
 of [DELTA]e]

Period Mean SD

1. Initial float (January 1794 to April 1821) 0.0114 0.0147

2. De facto gold standard (May 1821 to 0.0060 0.0070
December 1861)

 2a. Indirect de facto gold standard 0.0063 0.0068
 (May 1821 to July 1834)

 2b. U.S. bank suspension period 0.0089 0.0107
 (May 1837 to March 1842)

 2c. Postsuspension de facto gold standard 0.0047 0.0057
 (April 1842 to December 1861)

3. Greenback period (January 1862 to December 0.0224 0.0315
1878)

4. Classical gold standard (January 1879 to 0.0015 0.0014
June 1914)

5. Wartime disruption/controls (July 1914 to 0.0040 0.0118
March 1919)

6. First interwar float (April 1919 to April 0.0200 0.0209
1925)

7. Gold exchange standard (May 1925 to August 0.0008 0.0008
1931)

8. Second interwar float (September 1931 to 0.0155 0.0260
August 1939)

9. Wartime disruption/controls 0.0052 0.0202
(September 1939 to September 1949)

10. Bretton Woods (October 1949 to July 1971) 0.0017 0.0068

 10a. Predevaluation Bretton 0.0010 0.0011
 Woods (October 1949 to October 1967)

11. Current float (August 1971 to December 0.0186 0.0155
2005)

 Price Ratio
 [absolute value
 of [DELTA]
 ([p.sup.*] - p)]

Period Mean SD

1. Initial float (January 1794 to April 1821) 0.0237 0.0188

2. De facto gold standard (May 1821 to 0.0198 0.0159
December 1861)

 2a. Indirect de facto gold standard 0.0219 0.0163
 (May 1821 to July 1834)

 2b. U.S. bank suspension period 0.0209 0.0149
 (May 1837 to March 1842)

 2c. Postsuspension de facto gold standard 0.0177 0.0155
 (April 1842 to December 1861)

3. Greenback period (January 1862 to December 0.0209 0.0212
1878)

4. Classical gold standard (January 1879 to 0.0118 0.0095
June 1914)

5. Wartime disruption/controls (July 1914 to 0.0156 0.0125
March 1919)

6. First interwar float (April 1919 to April 0.0156 0.0129
1925)

7. Gold exchange standard (May 1925 to August 0.0096 0.0073
1931)

8. Second interwar float (September 1931 to 0.0104 0.0096
August 1939)

9. Wartime disruption/controls 0.0116 0.0146
(September 1939 to September 1949)

10. Bretton Woods (October 1949 to July 1971) 0.0046 0.0043

 10a. Predevaluation Bretton 0.0046 0.0045
 Woods (October 1949 to October 1967)

11. Current float (August 1971 to December 0.0062 0.0110
2005)

TABLE 2
Statistical Tests on q for Regime Pairs

 Variance Ratio
 F Test

Regime Pair [S.sup.2.sub.1]/ p Value
 [S.sup.2.sub.2]

Initial float (1) and de facto gold 1.739 .00000 *
standard (2)

De facto gold standard (2) and 1.974 .00000 *
greenback period (3)

Greenback period (3) and classical 5.855 .00000 *
gold standard (4)

Classical gold standard (4) and first 3.531 .00000 *
interwar float (6)

First interwar float (6) and gold 5.353 .00000 *
exchange standard (7)

Gold exchange standard (7) and second 4.411 .00000 *
interwar float (8)

Second interwar float (8) and Bretton 6.838 .00000 *
Woods (10)

Bretton Woods (10) and current float 7.723 .00000 *
(1l)

All floating (1, 3, 6, 8, 11) and all 2.632 .00000 *
fixed (2, 4, 7, 10)

All floating (1, 3, 6, 8, 11) and 2.203 .00000 *
fixed except Bretton Woods (2, 4, 7)

 Wilcoxon Wald-Wolfowitz
 Test Test

Regime Pair p Value u p Value

Initial float (1) and de facto gold .00002 * -1.260 .20749
standard (2)

De facto gold standard (2) and .15163 0.316 .75182
greenback period (3)

Greenback period (3) and classical .00000 * -2.808 .04977 *
gold standard (4)

Classical gold standard (4) and first .00081 * -1.660 .09699
interwar float (6)

First interwar float (6) and gold .00058 * -2.893 .00382 *
exchange standard (7)

Gold exchange standard (7) and second .00254 * 0.028 .97803
interwar float (8)

Second interwar float (8) and Bretton .00000 * -6.556 .00000 *
Woods (10)

Bretton Woods (10) and current float .00000 * -9.389 .00000 *
(1l)

All floating (1, 3, 6, 8, 11) and all .00000 * -5.557 .00000 *
fixed (2, 4, 7, 10)

All floating (1, 3, 6, 8, 11) and .00000 * -2.913 .00357 *
fixed except Bretton Woods (2, 4, 7)

* Rejection of null hypothesis at 95% level.

TABLE 3
Statistical Tests on p *--p for Regime Pairs

 Variance
 Ratio F Test

Regime Pair [S.sup.2.sub.1]/ p Value
 [S.sup.2.sub.2]

Initial float (1) and de facto gold 1.412 .00025 *
standard (2)

De facto gold standard (2) and 1.372 .00309 *
greenback period (3)

Greenback period (3) and classical 3.864 .00000 *
gold standard (4)

Classical gold standard (4) and first 1.785 .00028 *
interwar float (6)

First interwar float (6) and gold 2.840 .00001 *
exchange standard (7)

Gold exchange standard (7) and second 1.384 .07316
interwar float (8)

Second interwar float (8) and Bretton 5.421 .00000 *
Woods (10)

Bretton Woods (10) and current float 4.331 .00000 *
(11)

All floating (1, 3, 6, 8, 11) and all 1.539 .00000 *
fixed (2, 4, 7, 10)

All floating (1, 3, 6, 8, 11) and 1.247 .00020 *
fixed except Bretton Woods (2, 4, 7)

 Wilcoxon Wald-Wolfowitz
 Test Test

Regime Pair p Value u p Value

Initial float (1) and de facto gold .00489 * 1.293 .19591
standard (2)

De facto gold standard (2) and .71445 -0.418 .67606
greenback period (3)

Greenback period (3) and classical .00000 * -2.808 .04977 *
gold standard (4)

Classical gold standard (4) and first .03465 * 0.156 .87573
interwar float (6)

First interwar float (6) and gold .00704 * -0.243 .80776
exchange standard (7)

Gold exchange standard (7) and second .74651 -1.377 .16862
interwar float (8)

Second interwar float (8) and Bretton .00000 * -3.841 .00012 *
Woods (10)

Bretton Woods (10) and current float .10436 -3.539 .00040 *
(11)

All floating (1, 3, 6, 8, 11) and all .64097 -1.092 .27499
fixed (2, 4, 7, 10)

All floating (1, 3, 6, 8, 11) and .00002 * -0.897 .36994
fixed except Bretton Woods (2, 4, 7)

* Rejection of null hypothesis at 95% level.

TABLE 4
Correlations
 Correlations

 [DELTA]q, [DELTA]q, [DELTA]
 [DELTA]e ([p.sup.*] - p)

1. Initial float (January .4700 .8397
1794 to April 1821)

2. De facto gold standard .2303 .9357
(May 1821 to December
1861)

 2a. Indirect de facto gold .1453 .9419
 standard (May 1821 to
 July 1834)

 2b. U.S. bank suspension .3255 .8562
 period (May 1837 to
 March 1842)

 2c. Postsuspension de .2805 .9536
 facto gold standard
 (April 1842 to December
 1861)

3. Greenback period .6872 .3295
(January 1862 to December
1878)

4. Classical gold standard .0158 .9912
(January 1879 to June
1914)

5. Wartime disruption/ .5721 .8583
controls (July 1914 to
March 1919)

6. First interwar float .7504 .3224
(April 1919 to April 1925)

7. Gold exchange standard .2312 .9858
(May 1925 to August 1931)

8. Second interwar float .8857 -.0846
(September 1931 to August
1939)

9. Wartime disruption/ .7402 .6588
controls (September 1939
to September 1949)

1'. Bretton Woods (October .7895 .7040
1949 to July 1971)

 10a. Predevaluation .3091 .9710
 Bretton Woods (October
 1949 to October 1967)

11. Current float (August .8864 .4602
1971 to December 2005)

 [DELTA]e, [DELTA] [DELTA]p,
 ([p.sup.*] - p) [DELTA][p.sup.*]

1. Initial float (January -.0847 .1426
1794 to April 1821)

2. De facto gold standard -.1278 .2181
(May 1821 to December
1861)

 2a. Indirect de facto gold -.1955 .0866
 standard (May 1821 to
 July 1834)

 2b. U.S. bank suspension -.2098 -.0312
 period (May 1837 to
 March 1842)

 2c. Postsuspension de -.0215 .3110
 facto gold standard
 (April 1842 to December
 1861)

3. Greenback period -.4594 .2807
(January 1862 to December
1878)

4. Classical gold standard -.1169 .4163
(January 1879 to June
1914)

5. Wartime disruption/ .0701 .5397
controls (July 1914 to
March 1919)

6. First interwar float -.3837 .7320
(April 1919 to April 1925)

7. Gold exchange standard .1406 .4044
(May 1925 to August 1931)

8. Second interwar float -.5374 .4578
(September 1931 to August
1939)

9. Wartime disruption/ -.0181 .0140
controls (September 1939
to September 1949)

1'. Bretton Woods (October .1200 .3949
1949 to July 1971)

 10a. Predevaluation .0730 .4181
 Bretton Woods (October
 1949 to October 1967)

11. Current float (August -.0031 .0576
1971 to December 2005)

TABLE 5
Variance of q and Component Shares

 1000 x Share
 Var([DELTA]q) due to [DELTA]e

1. Initial float (January 1794 1.168 29.7
to April 1821)

2. De facto gold standard (May 0.672 12.6
1821 to December 1861)

 2a. Indirect de facto gold 0.733 11.7
 standard (May 1821 to July
 1834)

 2b. U.S. bank suspension 0.697 27.9
 period (May 1837 to March
 1842)

 2c. Postsuspension de facto 0.600 9.1
 gold standard (April 1842
 to December 1861)

3. Greenback period (January 1.326 113.0
1862 to December 1878)

4. Classical gold standard 0.227 1.8
(January 1879 to June 1914)

5. Wartime disruption/controls 0.587 26.5
(July 1914 to March 1919)

6. First interwar float (April 0.800 105.1
1919 to April 1925)

7. Gold exchange standard (May 0.149 0.9
1925 to August 1931)

8. Second interwar float 0.659 139.6
(September 1931 to August 1939)

9. Wartime disruption/controls 0.769 56.6
(September 1939 to September
1949)

10. Bretton Woods (October 1949 0.096 51.2
to July 1971)

10a. Predevaluation Bretton 0.042 5.7
Woods (October 1949 to October
1967)

11. Current float (August 1971 0.744 78.8
to December 2005)

 Share due to Share due to
 [DELTA] [2.sup.*]cov(e,
 ([p.sup.*] - p) [p.sup.*] - p)

1. Initial float (January 1794 78.5 -8.2
to April 1821)

2. De facto gold standard (May 96.3 -8.9
1821 to December 1861)

 2a. Indirect de facto gold 101.8 -13.5
 standard (May 1821 to July
 1834)

 2b. U.S. bank suspension 93.5 -21.4
 period (May 1837 to March
 1842)

 2c. Postsuspension de facto 92.2 -1.2
 gold standard (April 1842
 to December 1861)

3. Greenback period (January 66.9 -79.9
1862 to December 1878)

4. Classical gold standard 101.4 -3.1
(January 1879 to June 1914)

5. Wartime disruption/controls 67.6 5.9
(July 1914 to March 1919)

6. First interwar float (April 51.2 -56.3
1919 to April 1925)

7. Gold exchange standard (May 96.6 2.6
1925 to August 1931)

8. Second interwar float 30.3 -69.9
(September 1931 to August 1939)

9. Wartime disruption/controls 45.2 -1.8
(September 1939 to September
1949)

10. Bretton Woods (October 1949 38.2 10.6
to July 1971)

10a. Predevaluation Bretton 90.9 3.3
Woods (October 1949 to October
1967)

11. Current float (August 1971 21.4 -0.3
to December 2005)

TABLE 6
Alternate Price Series, 1950-66

 Alternate
 PPI Series
 Series (Hanes/Sauerbeck)

SD of [absolute value of [DELTA]p] .0264 .0341
SD of [absolute value of [DELTA][p.sup.*]] .0454 .0514
SD of [absolute value of [DELTA]q] .0220 .0235
Autocorrelation of p .7577 .2760
Autocorrelation of [p.sup.*] .9203 .2814
Autocorrelation of q .9563 .6185
Correlation of [DELTA]p, [DELTA][p.sup.*] .8735 .8050

TABLE 7
Phillips-Perron Unit Root Test Statistics

 t p Value

1. Initial float (January 1794 to April 1821) -2.400 .142

2. De facto gold standard (May 1821 to December -3.022 .034 *
1861)

 2a. Indirect de facto gold standard (May 1821 -2.477 .123
 to July 1834)

 2b. U.S. bank suspension period (May 1837 to -1.840 .358
 March 1842)

 2c. Postsuspension de facto gold standard -2.898 .047 *
 (April 1842 to December 1861)

3. Greenback period (January 1862 to December -2.324 .166
1878)

4. Classical gold standard (January 1879 to June -3.015 .034 *
1914)

5. Wartime disruption/controls (July 1914 to -3.197 .025 *
March 1919)

6. First interwar float (April 1919 to April -2.625 .093
1925)

7. Gold exchange standard (May 1925 to August -2.321 .168
1931)

8. Second interwar float (September 1931 to -1.381 .589
August 1939)

9. Wartime disruption/controls (September 1939 -1.445 .558
to September 1949)

10. Bretton Woods (October 1949 to July 1971) -1.584 .490

 10a. Predevaluation Bretton Woods (October -0.973 .763
 1949 to October 1967)

11. Current float (August 1971 to December 2005) -1.978 .297

 January 1794 to December 2005 -5.378 .000 *

 January 1794 to June 1914 -4.726 .000 *

 July 1914 to December 2005 -3.384 .012 *

 October 1949 to December 2005 -2.245 .130

* Rejection of null hypothesis at 95% level.

TABLE 8
Univariate Autoregression [q.sub.t] = [mu] + [rho][q.sub.t -1]
(SEs in Parentheses)
 [mu] [rho]

1. Initial float (January 1794 to .024 (0.011) .970 (0.014)
April 1821)

2. De facto gold standard (May 1821 to .042 (0.013) .953 (0.014)
December 1861)

 2a. Indirect de facto gold standard .063 (0.027) .930 (0.030)
 (May 1821 to July 1834)

 2b. U.S. bank suspension period (May .048 (0.034) .950 (0.038)
 1837 to March 1842)

 2c. Postsuspension de facto gold .067 (0.023) .928 (0.025)
 standard (April 1842 to December
 1861)

3. Greenback period (January 1862 to .052 (0.021) .940 (0.024)
December 1878)

4. Classical gold standard (January .029 (0.010) .964 (0.013)
1879 to June 1914)

5. Wartime disruption/controls (July .168 (0.055) .828 (0.057)
1914 to March 1919)

6. First interwar float (April 1919 to .120 (0.047) .846 (0.060)
April 1925)

7. Gold exchange standard (May 1925 to .068 (0.031) .903 (0.044)
August 1931)

8. Second interwar float (September .018 (0.016) .975 (0.023)
1931 to August 1939)

9. Wartime disruption/controls .027 (0.019) .964 (0.025)
(September 1939 to September 1949)

10. Bretton Woods (October 1949 to .020 (0.005) .973 (0.008)
July 1971)

 10a. Predevaluation Bretton Woods .015 (0.004) .980 (0.005)
 (October 1949 to October 1967)

11. Current float (August 1971 to .011 (0.007) .986 (0.008)
December 2005)

 [R.sup.2] Durbin-Watson

1. Initial float (January 1794 to .939 1.64
April 1821)

2. De facto gold standard (May 1821 to .906 2.00
December 1861)

 2a. Indirect de facto gold standard .860 1.89
 (May 1821 to July 1834)

 2b. U.S. bank suspension period (May .918 1.92
 1837 to March 1842)

 2c. Postsuspension de facto gold .858 2.11
 standard (April 1842 to December
 1861)

3. Greenback period (January 1862 to .887 1.83
December 1878)

4. Classical gold standard (January .932 1.98
1879 to June 1914)

5. Wartime disruption/controls (July .798 1.88
1914 to March 1919)

6. First interwar float (April 1919 to .741 1.49
April 1925)

7. Gold exchange standard (May 1925 to .855 1.54
August 1931)

8. Second interwar float (September .949 1.47
1931 to August 1939)

9. Wartime disruption/controls .925 1.20
(September 1939 to September 1949)

10. Bretton Woods (October 1949 to .983 1.59
July 1971)

 10a. Predevaluation Bretton Woods .994 1.82
 (October 1949 to October 1967)

11. Current float (August 1971 to .971 1.47
December 2005)

TABLE 9
Variance Ratios

 6 Mo 12 Mo 24 Mo 36 Mo 48 Mo

1. Initial float (January 1.15 1.09 1.01 0.92 0.85
1794 to April 1821)

2. De facto gold standard 0.79 0.59 0.49 0.44 0.41
(May 1821 to December
1861)

 2a. Indirect de facto 0.86 0.64 0.54 0.44 0.28
 gold standard (May 1821
 to July 1834)

 2b. U.S. bank suspension 0.70 0.61 0.33 0.04 0.06
 period (May 1837 to March
 1842)

 2c. Postsuspension de 0.69 0.53 0.38 0.30 0.30
 facto gold standard
 (April 1842 to December
 1861)

3. Greenback period 0.64 0.47 0.47 0.44 0.33
(January 1862 to December
1878)

4. Classical gold 1.00 0.93 0.80 0.69 0.50
standard (January 1879 to
June 1914)

5. Wartime 0.98 0.75 0.57 0.29 0.16
disruption/controls (July
1914 to March 1919)

6. First interwar float 0.85 0.48 0.26 0.18 0.15
(April 1919 to April
1925)

7. Gold exchange standard 0.91 0.44 0.23 0.13 0.09
(May 1925 to August 1931)

8. Second interwar float 1.29 1.61 0.78 0.28 0.19
(September 1931 to August
1939)

9. Wartime 1.08 1.19 0.72 0.36 0.24
disruption/controls
(September 1939 to
September 1949)

10. Bretton Woods 1.36 1.62 1.80 1.66 1.35
(October 1949 to July
1971)

 10a. Predevaluation 1.19 1.49 1.67 1.20 0.90
 Bretton Woods (October
 1949 to October 1967)

11. Current float (August 1.32 1.33 1.33 1.30 1.17
1971 to December 2005)
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Publication:Economic Inquiry
Geographic Code:4EUUK
Date:Oct 1, 2010
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