Lost in intervention. The Harrod–Balassa–Samuelson effect on the peseta/dollar real exchange rate (1870–1998)

ABSTRACT

We have decomposed the peseta/dollar real exchange rate (1870–1998) into its trend and cyclical components and used the former to proxy its time-varying equilibrium. Then, we have compared changes in the equilibrium with changes in the Spanish and the USA productivity differentials to identify years that do not fit with the Harrod–Balassa–Samuelson (HBS) hypothesis. The greatest maladjustment is found in the 1940s and 1950s, decades of strong exchange rate intervention in Spain. Conversely, the link between equilibrium and differentials adjusts to the hypothesis when using the non-intervened peseta/dollar exchange rate on the Tangier black market. These contrasting results back up the idea that exchange rate intervention, so common in developing countries, might explain their scanter evidence in favour of the HBS effect.

KEYWORDS:

• Real exchange rate equilibrium
• productivity differentials
• peseta/dollar rate

JEL CLASSIFICATION:

• F31
• N20

Acknowledgement

The authors thank one anonymous referee and the editor, David Peel, for their comments on an earlier version of this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ For a discussion of the issue, see Lothian and Taylor (2008). Another line of research for rationalizing the slow reversion to equilibrium has been the nonlinear modelling of real exchange rates. In these models, trade frictions are assumed to define a band within which goods arbitrage is not profitable and, consequently, no reversion to the PPP equilibrium is expected. Thus, by introducing a threshold, supposedly representative of trade frictions, into the real exchange rate adjustment, several works have succeeded in enlarging the evidence of reversion as well as reducing half-life deviations from equilibrium (Michael, Nobay, and Peel 1997; Taylor, Peel, and Sarno 2001; Sarno and Valente 2006; Pavlidis, Paya, and Peel 2011).

² This approach is in line with Chen and MacDonald (2015), who applied the unobserved components approach to the modelling of the dollar/euro permanent equilibrium exchange rate.

³ From 1940 to 1948, the exchange rate was fixed at 11.22 and 10.95 pesetas/dollar for imports and exports, respectively. In 1948, a system of multiple exchange rates was introduced, with nine import exchange rates ranging from the basic import rate of 11.22 to 27.38 pesetas/dollar. As regards exports, in December 1948, 15 exchange rates were set, the rates ranging from the 10.95 to 21.90 pesetas/dollar.

⁴ In October 1950, the nine import rates were reduced to seven and different percentages of currency to negotiate on the stock market were set, the percentages being 0%, 40%, 60% or 100%, depending on the type of product. A year later, in October 1951, the 15 export rates were reduced to one and the percentage of foreign currency allowed to be auctioned ranged from 10% to 90%, depending on the product. This panoply of rates was formally unified in 1957, but the unification was merely apparent since a system of surcharges and bonuses started working shortly afterwards.

⁵ More specifically, we compare the evolution of Spanish data on industrial versus services productivity with that of the USA. So, unlike previous literature, where the most common procedure is to use domestic and foreign real GDPs per capita as proxies for tradable sector productivities, we do not assume invariant nontradeable sector productivities.

⁶ This model is based on Clark’s decomposition of real GDP into stochastic trend and transitory components (Clark 1987).

⁷ Apart from blurring the HBS effect, intervention on the exchange rate markets, taken as a trade friction, might also help to explain why the peseta/dollar series, when modelled as a linear process, shows long-lived deviations from equilibrium (a half-life deviation of 12 years). We cannot reject linearity against nonlinearity in the modelling of the peseta/dollar real exchange rate in 1870–1998. Interestingly enough, an STAR nonlinear analysis of the series identifies the 1940s as a decade of sustained real appreciation.

Additional information

Funding

This work was supported by the Ministerio de Ciencia e Innovación [grant number ECO2012-08204]; the Diputación General de Aragón (SEIM research group, [grant number SEC 269191/2]).