Did Purchasing Power Parity Hold in Medieval Europe?

28 Pages Posted: 12 Dec 2013 Last revised: 17 Jun 2016

Adrian R. Bell

University of Reading - ICMA Centre

Chris Brooks

University of Reading - ICMA Centre

Tony K. Moore

University of Reading - ICMA Centre

Date Written: February 2016

Abstract

This paper employs a unique, hand-collected dataset of exchange rates for five major currencies (the lira of Barcelona, the pound sterling of England, the pond groot of Flanders, the florin of Florence and the livre tournois of France) to consider whether the law of one price and purchasing power parity held in Europe during the late fourteenth and early fifteenth centuries. Using single series and panel unit root and stationarity tests on ten real exchange rates between 1383 and 1411, we show that the parity relationship held for the pound sterling and some of the Florentine florin series individually and for almost all of the groups that we investigate. Our findings add to the weight of evidence that trading and arbitrage activities stopped currencies deviating permanently from fair values and that the medieval financial markets were well functioning. This supports the results reported in other recent studies which indicate that many elements of modern economic theories can be traced back over 700 years in Europe.

Keywords: Law of one price, purchasing power parity, medieval markets, historical finance

JEL Classification: F31, N13, N23

Suggested Citation

Bell, Adrian R. and Brooks, Chris and Moore, Tony K., Did Purchasing Power Parity Hold in Medieval Europe? (February 2016). Available at SSRN: https://ssrn.com/abstract=2366549 or http://dx.doi.org/10.2139/ssrn.2366549

Adrian R. Bell

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Chris Brooks (Contact Author)

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom
+44 118 931 82 39 (Phone)
+44 118 931 47 41 (Fax)

Tony K. Moore

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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