James R. Lothian

Real Exchange Rate Behavior: The Recent Float from the Perspective of the Past Two Centuries

Using annual data spanning two centuries for dollar-sterling and franc-sterling real exchange rates, we find strong evidence of mean-reverting real exchange rate behavior. Using simple, stationary, autoregressive models estimated on prefloat data, we easily outperform nonstationary real exchange rate models in dynamic forecasting exercises over the recent float. Such stationary univariate equations explain 60-80 percent of the in-sample variation in real exchange rates, although the degree of short-run persistence may be high. The econometric estimates imply a half-life of shocks to the real exchange rate of about 6 years for dollar-sterling and a little under 3 years for franc-sterling.

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

Using data since 1820 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 across nominal regimes. A statistically significant HBS effect for sterling-dollar captures its long-run trend and explains a proportion of variation in changes in the real rate that is proportional to the time horizon of the change. There is significant evidence of nonlinear reversion towards long-run equilibrium and downwards shifts in volatility during fixed nominal exchange rate regimes. Copyright

Multi-Country Evidence on the Behavior of Purchasing Power Parity under the Current Float

Using panel data for the United States and 22 other OECD countries for the current float, this paper presents evidence that despite substantial short-term perturbations, purchasing power parity actually performed much better than commonly believed. Average rates of growth of real exchange rates over long horizons bear little relationship either to average rates of growth of nominal exchange rates or to average inflation differentials, thus implying a close to one-to-one relation between average rates of growth of nominal exchange rates and average inflation differentials. Panel-data variants of standard unit-root tests suggest that the real exchange rates of these countries can be characterized as mean-reverting.

Real exchange rate behavior

Abstract Using random simulations with artificial data with identical sample characteristics to the long-sample exchange rate data employed by Lothian and Taylor (Lothian, J.R. and Taylor, M.P. (1996). The recent float from the perspective of the past two centuries. Journal of Political Economy 104, 488–509.), we show that standard unit-root tests have extremely low power over sample sizes corresponding to the recent float. The probability of rejecting the null hypothesis when it is false is extremely low with 20 years or even 50 years of data and only reaches an acceptable level over much longer spans.

Purchasing power parity over two centuries: strengthening the case for real exchange rate stability: A reply to Cuddington and Liang

Cuddington and Liang (2000)[Purchasing Power parity over two centuries? Journal of International Money and Finance, 19, 751-755] examine the long span of sterling-dollar real exchange rate data of Lothian and Taylor (1996) [Real exchange rate behavior: the recent float from the perspective of the past two centuries. Journal of Political Economy, 104, 488-509] and claim to reject long-run purchasing power parity by fitting time trends or by considering very high-order autoregressive representations. This reply demonstrates, however, that the central claims of Lothian and Taylor are in fact strengthened by the implications of Cuddington and Liangs analysis in that, while the economic importance of introducing trend terms is slight, this leads to a faster estimated speed of mean reversion.

The International Transmission of Inflation

Inflation became the dominant economic, social, and political problem of the industrialized West during the 1970s. This book is about how the inflation came to pass and what can be done about it.

Some new stylized facts of floating exchange rates

Abstract This paper re-examines real exchange rate behavior of OECD currencies under the current float using the more extensive dataset that an additional decades worth of experience has made available. What emerges is a new set of stylized facts, which suggest that the problems of the current float were not, as commonly believed, generic to that system but in fact rather specific, being largely confined to one sub-period — the early and mid-1980s — and one currency — the US dollar. This dollar behavior ranks as one of the important puzzles of the past 25 years.

The response of exchange rates to permanent and transitory shocks under floating exchange rates

Abstract Using the joint behavior of inflation and real exchange rates, we develop an empirical model to uncover the sources of the fluctuations in the real dollar exchange rates of four major industrial countries under the current float. This model allows us to construct two time series for each country pair, one representing the permanent component of each real exchange rate, and the other the purely transitory component. Over the period as a whole, transitory shocks played a relatively small but statistically significant role. Real dollar exchange rates therefore did not simply evolve in response to permanent shocks. Instead, there are instances in which temporary shocks made a substantial contribution. We conclude that the random walk model, though an approximate statistical description of real-exchange-rate behavior, is a poor guide to model structure. (JEL F31).

International Financial Relations under the Current Float: Evidence from Panel Data

This paper uses multi-country data for the period 1973–1994 to investigate five key equilibrium conditions in international finance—purchasing power parity, the Fisher equation, uncovered interest parity, and the equity-return analogues of the latter two. The results are largely consistent with theoretical expectations. Over the long run, purchasing power parity, uncovered interest parity and the Fisher effect prove to be rather good first approximations. The equity-return relations, though somewhat less so are nevertheless much better behaved than past studies would lead one to expect. Average rates of equity returns keep pace with inflation within countries in almost all instances; across countries, they are positively correlated with average rates of inflation. This is particularly the case when the data period is extended to include earlier decades.

The internationalization of money and finance and the globalization of financial markets

In this paper, I combine long multi-country time series data for interest rates and stock returns with the institutional evidence for much earlier centuries amassed by economic historians to study the question of financial globalization and how it has altered since the late classical era. At their longest, for Dutch and English short-term interest rates, the quantitative data that I use extend back slightly more than three centuries. The institutional history provides information on an additional millenniums worth of experience. The conclusion that I reach is that the internationalization of money and finance and the globalization of financial markets are not new phenomena. They are part of an evolutionary process that began much earlier and that has continued, albeit with periodic interruptions and reversals, for many centuries. What we see today is simply the latest and most advanced manifestation of this process.