Real exchange rates between the wars

Abstract

Bilateral real exchange rates are analyzed for fifteen countries over the period 1925–1937, using a benchmark-invariant principal components technique. For the period 1925–1931, half of real exchange rate variation originates from countries on floating exchange rates, and half from price level differences between countries on the gold standard. For the period 1931–1937, real exchange rate movements between the sterling-bloc, the European gold-bloc, and the US and Canada appear dominant. Within bloc variation is secondary and mostly due to competitive devaluations. Our results support earlier evidence that the nominal exchange rate regime to a large extent determines real exchange rate variation.