DP4492 Measuring Market Integration: Foreign Exchange Arbitrage and the Gold Standard 1874-1913

Author(s): Eugene Canjels, Gauri Prakash-Canjels, Alan M. Taylor
Publication Date: August 2004
Keyword(s): dollar, gold points, market integration, sterling
JEL(s): F30, N10
Programme Areas: International Macroeconomics
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=4492

A major question in the literature on the classical gold standard concerns the efficiency of international arbitrage. Authors have examined efficiency by looking at the spread of the gold points, gold point violations, the flow of gold, or by tests of various asset market criteria, including speculative efficiency and interest arbitrage. These studies have suffered from many limitations, both methodological and empirical. We offer a new methodology for measuring market integration based on nonlinear theoretical models and threshold autoregressions. We also compile a new, high-frequency series of continuous daily data from 1879 to 1913. We can derive reasonable econometric estimates of the implied gold points and price dynamics. The changes in these measures over time provide an insight into the evolution of market integration.